Remembering Milton Friedman, 1912-2006

A great and important economist died today, Milton Friedman (he won the Nobel Prize in 1976). Among his many books are Capitalism and Freedom and the best seller Free to Choose. He was an advocate for free market policies. His ideas on macro polciy have been influential, helping convince central banks and monetary authorities (like the Federal Reserve) to do more to fight inflation. By keeping inflation in check, we all prosper since it makes long-term investing and saving more viable. Many Americans probably don't realize how much we owe to Friedman. It seems like no one recalls that from 1975-1983 both inflation and unemployment averaged 7.7% (inflation has averaged just about 3% since 1983-unemployment averaged 5.75% in the 1990s and 5.11% since 2000).

Here is a brief biographical exerpt of his contributions found at The Conscise Encyclopedia of Economics

"Although much of his trail-blazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level is dependent upon the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in the money supply cause employment and output to increase, and decreases in the money supply have the opposite effect.

Friedman's solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money supply rule. If the Federal Reserve board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Friedman's monetarism came to the forefront when, in 1963, he and Anna Schwartz coauthored Monetary History of the United States, 1867-1960. In it they contend that the Great Depression was the result of ill-conceived monetary policies by the Federal Reserve."

But there is more. This year's winner of the Nobel Prize in Economics, Edmund Phelps, got the award for a contribution that both he and Friedman made (so Friedman could have won two Nobel Prizes). Here is the explanation for Phelps getting the award from The New York Sun

"Mr. Phelps demonstrated in a series of articles published in the late 1960s and 1970 that unemployment could not be reduced or held down by inflating prices. He introduced the concept of "expectations" into the conversation about inflation, arguing that the expected rates of inflation and unemployment play an important role in determining what future inflation and unemployment rates will be: that is, high expected rates of inflation contribute to high inflation. Milton Friedman, a 1976 Nobel recipient and renowned capitalist theorist, advanced a similar theory."