Introduction.
Born in 1912 by Jewish immigrants in New York, Milton Friedman was a renowned statistician and economist best known for his contributions in the free-market capitalism. Throughout his distinguished career, Friedman made major contributions to the analysis and conducts of economics and economic policies. His significant work encompassed money, economic history, economic methodology, micro and macro-economics, international economics and economic policy (Friedman, Savage, and Becker, 2007). His work towards the development of economics as a subject remains a key mark in the literature of development of economics. Most of his theories and concepts are still in use, in most economies; however, to a large extent they have been criticized with their limitations. Nevertheless, the concepts developed by Friedman contribute to the growth of many economies, America being one of them.
Friedman made a landmark with the introduction of the theory of consumption function, developed in 1957. The concept on the theory was a development of the Keynesian view that individuals or households consume depending on their levels of income (Hammond, 2005). Friedman argued that instead of consumption being dependent on income as put across by Keynes, the annual consumption should be treated as a function of individual or household’s permanent income.
Much of Friedman work revolved around the price theory that offered an explanation on how prices are determined in individual markets. The price theory was also a critique of Keynes, which brought the idea that price levels depend on the money supply (Friedman, Savage, and Becker, 2007). This developed the quantity theory of money which Friedman published in 1956. Friedman argued that increases in monetary growth leads to increases in prices in the long run, but has little or no effect on production. In the short run, Friedman argued that increases in money supply lead to increases in output and employment, while decreases in money supply triggers an opposite effect.
In the quantitative theory of money, Friedman felt that there existed a distinctive feature for real balances. He argued that while the monetary authorities controlled nominal stock of money, what mattered to the money owners was the real quantity of money. He suggested that monetary policy should, therefore, ensure stable growth in money supply in the long run. The quantity theory of money also contributed to the concept of inflation, which was later developed to the expected-augmented Phillips curve (Friedman, Savage, and Becker, 2007). The quantity theory of money indicated that if the money supply grew at a faster rate that growth of output the results would be inflation. Inflation would limit the levels of investments, consumption and savings. Unemployment would also result due to decreased investment levels (Hammond, 2005). This brought up the issue on the trade off that existed between inflation and unemployment. In the debates that raged in the profession, in 1970’s, Friedman introduced the hypothetical preposition on the existence of a trade-off between unemployment and inflation. Friedman argued that unemployment was a temporary phenomenon triggered by inflation, which died off in the long-run hence no trade-off existed between the two.
Importance’s of these theories.
Friedman theories have helped the economy as most concepts, whether changed or not, are still in use. His idea on free markets have been a key engineer to economic development as it has enhanced free flow in the supply and demand of products. Friedman concept on the role of central bank in controlling the money supply, which controls economic growth, recession and inflation, are still helpful even at the current policy formulations (Hammond, 2005). His concepts on money supply are still used by the central bank in managing the amounts of the money supply and the economies financial systems. However, as economic development continues to have improvements and changes in policies, some of Friedman’s economic contributions may not be practical. For instance, the central bankers do not follow the implementation of monetary policy as it is considered practical. Nevertheless, the idea on the flow, supply and demand for money in economic growth and stabilization still traces its roots to this professor of economics.
Suggested economic plans.
At every available opportunity, Friedman argued in favor of free market and against government intervention. He believed in freedom in personal lives and the markets. He argued that though market capitalism was not the perfect solution to economic development, it was by far best out of many alternatives that have been developed today.
Most of the theories developed by Friedman, would not agree with the current policies used in this economy. The current policies favor development and income that caters for issues instantly, but fail to recognize the need for long term solutions for these issues (Ali, 2005). The policies have shifted from being determinant of economic development to a few individuals who own the factors of production. These individuals determine price levels, income, consumption, savings, and interest rates. The effects are lack of economic control, which leads to inflation and price instabilities.
Most current policy makers and economists criticize Friedman’s theories due to the unrealizable benefits they have on the short run. However, looking at countries like China and India that took his concepts at heart, such economies are reaping significant economic benefits. His ideas on free markets provided a new way of economical sustainability, and offered alternatives to maintain sound economies.
If Friedman was alive today, he would not agree with the current policies. Most of the policies adopted today are more of socialism than capitalism. The current policy makers have shifted into planning on investments and production levels. This dictates on consumption where production levels are determined in order to meet economic and human needs (Ali, 2005). Being socialists imply that some concepts like prices are overlooked, and this explains the recession and inflation trends, which have become a global challenge.
Another plan would be increased participation by the government in business practices. Currently, socialists have become agents of change. They implement policies that favor them in the short run and fail to recognize the need to have sustainable ideologies. The plan would be to ensure that the ownership structure shifts from socially to privately ownership so that means of production are operated for private benefits. This would act as an incentive for producers to engage in different economic activities, which may not realize profits in the short run but would provide the intended change in the long run (Ali, 2005). In the long run, consumption levels will increase as a result of increased levels of income, savings and investments will increase, and this will trigger economic development.
Conclusion.
Friedman’s contributions to economics have helped the economy as they have formed intellectual foundations for antigovernment policies. They created a foundation for tax cuts, anti-inflation policies, and an era of disciple central banking. His contributions made a material impact in changing Reagan’s opinions on market oriented solutions to policy challenges. Friedman showed that the government, at that time, had failed and resulted to an unstable economy, but the failure of the economy was not as a result of market failure.
His work has led to a re-evaluation of linkages that exist between the monetary policy, money, and an economy’s development. His work on the interpretation of the scope of fiscal and monetary policy in economic management had impacted significantly on how governments conduct economic policy. The Federal government, for example, derived the real meaning of effects of inflation in the 1970’s, and since then it has embraced the concepts of budgeting and controlled money supplies.
Reference.
Ali, A. J. (2005). Bad Management theories: Mistaken conclusion. Advances in Competitiveness Research. Vol. 13(1)
Friedman, M., Savage, L. J., & Becker, G. S. (2007). Milton Friedman on economics: Selected papers. Chicago: University of Chicago Press.
Hammond, J. D. (2005). Theory and measurement: Causality issues in Milton Friedman's monetary economics. Cambridge: Cambridge University Press.
