Rebirth of Monetarism

Milton Friedman is among the most publicly visible of modern economists. He has won respect from both his followers and those economists who disagree strongly with his views. Few significant honors in economics have not come Friedman’s way. He was president of the American Economic Association in 1967 and in 1976 received the Nobel Prize in economics. Looking very much like everyone’s “favorite uncle,” Friedman often disarms his adversaries with a wink and a gentle smile, but those who have argued with him find him a formidable debater. He is able to express complicated ideas in simple terms understandable by those untrained in formal economic theory. This makes him popular with the media and keeps Friedman in touch with a wide audience.

Friedman has been a vital force in attacking the orthodoxy of the Keynesian economics. He has done this in a way that combines his argumentative talents with solid, empirical research and a desire not merely to tear down existing economic theory but to restructure it. Friedman’s most notable research has involved monetary theory, but, as with all master economists, his thoughts have touched many areas of economics. In the monetary field, Friedman has reconstructed the quantity theory of money, reemphasized the importance and significance of monetary policy, questioned the Keynesian interpretation of the Great Depression, and developed his own prescriptions for preventing future economic catastrophe.

Friedman has also made major contributions in such areas as risk and insurance (answering why people simultaneously gamble and buy insurance) and has developed a theory of consumption based on wealth, as opposed to the Keynesian view that consumption depends only on current income.

Along the way, he has attempted to restate the classical liberal philosophy of Adam Smith in terms pertinent to the modern era. (Friedman’s admiration of Adam Smith is virtually unbounded: he wears a necktie patterned with cameos of Smith during public appearances.) Friedman has offered many ideas about replacing the influence of government with market solutions. For example, he argues that government should give vouchers (grants) to parents so that all children can attend schools tailored to their individual needs. He also argues that cash grants to poor people make more sense than such programs as food stamps because these grants would both leave more choices in the hands of the poor and require fewer tax dollars.

Friedman’s restatement of the quantity theory of money is important because it made the theory statistically testable, something the old theory was not. His restatement is essentially a theory of the demand for money, whereas the original version was a theory of the price level. Friedman’s analyses of the statistical evidence indicate that the demand for money is stable over the long run, and he concludes that large changes in the supply of money cause undesirable fluctuations in employment and in the price level. His disenchantment with fiscal policy is due in large measure to the fact that government deficits are most often financed by inflationary expansions of the supply of money and credit. Finally, Friedman has been critical of the performance of the Board of Governors of the Federal Reserve System. He sees the Fed as either following the wrong policy (trying to control interest rates instead of the money supply) or yielding to political pressure rather than sound economic logic.