Friedman, Milton (1912–)

“FOR HIS ACHIEVEMENTS in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy” Milton Friedman of the University of Chicago received the Nobel Prize in Economics in 1976. Fried-man's name is chiefly associated with the renaissance of the role of money in inflation and the consequent renewed understanding of the instrument of monetary policy. This strong emphasis on the role of money should be seen in the light of how economists—usually advocates of a narrow interpretation of Keynesian the-ory—had almost entirely ignored the significance of monetary policy when analyzing business cycles and inflation.

As far back as the 1950s, Friedman was a pioneer in the well-founded reaction to the earlier post-Keynesian one-sidedness. And he succeeded—mainly thanks to his independence in initiating a very lively and fruitful scientific debate that has been going on for more than a decade. In fact, the macroeconometric models of today differ greatly from those of a couple of decades ago as far as the monetary factors go, and this is very much thanks to Friedman. The widespread debate on Fried-man's theories also led to a review of monetary policies pursued by central banks in the United States. It is very rare for an economist to wield such influence, directly and indirectly, not only on the direction of scientific research but also on actual policies.

Friedman has carried out a number of studies, which, scientifically speaking, are both original and weighty in support of his analysis of the role of money. His empirical studies of the relationship between increase in the supply of money and the consequent changes in incomes and prices thus were founded on a new formulation of the theory of demand for money or liquid resources. His findings on the comparatively great relevance of the quantity theory in explaining developments are, in fact, built on the premise that the demand for money is very stable.

From a purely scientific point of view, Friedman's other achievements are of great interest. Of primary importance here is his refashioning of the theory of consumption based on the hypothesis that “permanent income,” and not year-to-year income, is the determining factor when assessing total consumption outlay. He makes the extremely valuable distinction between the temporary and more permanent incomes of households; Friedman has demonstrated that a much greater proportion of the former type of income is saved than the latter.

Friedman was the first to demonstrate that the accepted assumption of a simple trade-off between unemployment and the rate of inflation was only a temporary phenomenon; on the longer term (more than five years), no such trade-off exists. Unemployment below a structural level of balance thus leads, according to Fried-man's theory, to a cumulative increase in prices and wages mainly on account of the destabilizing influence exerted by expectations.

Friedman has demonstrated how both prolonged “effect-lags” and those of varying lengths—of changes in the supply of money, for example—can have a destabilizing effect. The conclusion he draws for economic policy from these findings has been the subject of lively debate. To put it briefly, it is that monetary policy should be simplified and that its goal should be to ensure a long-run stable growth rate of the supply of money. Friedman was among those who first realized—and could explain—why the Bretton Woods system, with relatively fixed rates of exchange, was due to break down sooner or later.

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