Khairul Azmi, Fahmi

1152700
Topic : Milton Friedman




Khairul Azmi, Fahmi
1152700
ECON 2D03
ASSIGNMENT #2
Topic : The Contributions of
Milton Friedman

Khairul Azmi, Fahmi
1152700
Topic : Milton Friedman


Milton Friedman is an American economist who was a professor at University of
Chicago. He was an economic advisor to the President of United States, Richard Nixon and also
a president of the American Economic Association back in 1967. Ten years later, he was
awarded Nobel Memorial Prize in Economic Sciences for his achievement in the field of
consumption analysis, monetary theory and for his demonstration of the complexity of
stabilization policy.
Friedman has made many contributions to the world economics since early 1950s. His
contributions include the condemnation on the Keynesian economics theory, initiated monetary
policy in which is govern by the central bank, the inflation-unemployment trade off, advocated
the flexible exchange rate and introduced the permanent income hypothesis. His work gives a
significant impact to the local and international economic policies and decisions since then.
In his work, Friedman used empirical results rather than economics assumptions. He took
the available theories to be based on while getting his empirical proof in making economics
decision. One of his great findings is proving the importance of monetary values in the economy
despite most of the economist in his age ignored this aspect. He claims that governing the
monetary flow is significant as it lead to the national growth and its positive snowball effects. As
a result, he introduced the monetarism in which todays economics decision is mainly based
upon. He stated that the rise in money supply would lead to higher income and subsequently
results in a stable demand for money. In addition, he mentioned that the main objective of the
monetary policy is to ensure a steady growth of money supplied in an economy. This is true as
the old practice of excessive production of money would cause inflation pull and conversely
driven down the consumers purchasing power.
Khairul Azmi, Fahmi
1152700
Topic : Milton Friedman


Along with the monetary policy, he argued the effectiveness of the Keynesians economic
policy to fight against inflation. Keynesian economics is a theory of total spending in which it is
called the aggregate demand in the economy.
2
In general, there are many determinants of
aggregate demand that can be used in economics decision making. However, Friedman criticized
the three types of time lags in the application of the policy which include observation lag,
decision lag and effect lag. For instance, lag could be happened when the government is making
a significant decision in changing the current amount of taxes to fight the inflation problem. Due
to mentioned uncertainty in Keynesian policy, Friedman argued that governing monetary policy
in achieving stable growth of money supply is the better option in resolving inflation.
In 1970s, Friedman also critiques the application of Philips Curve in correlating inflation
with unemployment. Philips Curve states that lower unemployment would cause a higher
amount of spending and thus resulting in a higher inflation rate. However, Friedman disagreed
that the effect of trade-off between inflation and unemployment in a Philips Curve stays
permanently in a long term but instead only occurs temporary. He stated that as the inflation rate
goes higher, the unemployment would consequently increase.
3
His stance could be advocated
since higher inflation rate means that higher price of goods and services. This would adversely
increase the firms cost of production and thus leading to the lay off workers or a reduction of
hiring of workers in the economy. This outcome has provided a significant impact in the current
analysis of international economics.
In addition, he also supported the use of flexible exchange rate in an economy during the
age where most economists advocated the fixed exchange rate. The reason behind this claim is
that the flexible exchange rate would improve the countrys balance of payment. This could be
Khairul Azmi, Fahmi
1152700
Topic : Milton Friedman


theoretically proven where deficit balance of payments would reduce the value of countrys
currency. As the local goods are relatively cheaper than the international goods, this will cause a
reduction in import and encourage more exports. As a result, this will allow the adjustment of
balance of payment to its equilibrium position. The notion was then accepted internationally
when the world chose flexible exchange rate regime 20 years after his claim.
Another advancement of economic analysis made by Friedman is the introduction of
Permanent Income Hypothesis. In general, changes in consumption cannot be easily forecasted
due to its numerous determinants. This has brought an adverse effect in planning and decision
making of current economic policies.
4
It is stated that an increase of household income may not
ensure the consumers would save more money or increase their spending. He claimed that the
consumers may only change their amount of cash flow when the current income is higher than
the expected long term income. This notion could be positively advocated as most consumers
always have their own prediction on the cash flow and the contingency plan in case of
emergency. Thus, an increase in household income would only improve spending in a long term
as lag in decision making occurs.
In a nutshell, Milton Friedman has contributed many policies, theories and improvement
of economic analysis. His beneficial contribution has been a major ground for central bank,
government and economists in making decisions on the current economic issues. These include
consideration of the use of monetary policy, Keynesians policy, flexible exchange rate,
Permanent Income Hypothesis as well as the relationship between inflation and unemployment
rate.

Khairul Azmi, Fahmi
1152700
Topic : Milton Friedman


Reference
1. "Keynesian Economics." : The Concise Encyclopedia of Economics. N.p., n.d. Web. 6 Feb.
2014. <http://www.econlib.org/library/Enc/KeynesianEconomics.html>.
2. "Milton Friedman." : The Concise Encyclopedia of Economics. N.p., n.d. Web. 9 Feb. 2014.
<http://www.econlib.org/library/Enc/bios/Friedman.html>.
3. Permanent Income Hypothesis. Investopedia. N.p., n.d. Web. 9 Feb 2014.
<http://www.investopedia.com/terms/p/permanent-income-hypothesis.asp>.