A Brief Background on Milton Friedman
Because classical economic thinking provided no insight to the causes or remedy for the economic disparity of the Great Depression, John Maynard Keyes’ theory that free markets alone could not effectively lead to full employment was able to gain traction. The idea that government intervention was necessary for an economy to be fully function incited much criticism from classical economists, especially in the latter half of the 1900’s. Milton Friedman was a leading economist at the forefront of this counter revolution, and he became a very influential advocate for free markets around the world. Many of his ideas for market policy, however, are criticized for being too misleading or overzealous.
A lot of economic thinking developed in the 1800’s and 1900’s has been based on the ideas of Homo economicus or the Economic Man, whose economic preferences are rational and can be found numerically through the use of a utility function. Keynesian ideas, however, were based more off of the ideas that decisions were compelled by “animal spirits” rather than a careful, rational decision making process. Friedman argued instead that people should be thought of as rational decision makers who make plans about lifetime spending, and theories should be judges by their predictive power rather than their realism.
In 1958, the economist A. W. Phillips made prevalent the idea that there is heavy correlation between inflation and unemployment. Economists began to widely accept the concept that high inflation is correlated with low unemployment and low inflation is correlated with high unemployment, until Friedman pointed out that high inflation is only a temporary remedy to high unemployment; the employment rate may decrease for a while, but in the long run, it will rise and inflation will also remain high. This theory was developed through the application of the rational decision making of the Economic Man and was tested and proven true by the period of high inflation in the 1970’s
A lot of economic thinking developed in the 1800’s and 1900’s has been based on the ideas of Homo economicus or the Economic Man, whose economic preferences are rational and can be found numerically through the use of a utility function. Keynesian ideas, however, were based more off of the ideas that decisions were compelled by “animal spirits” rather than a careful, rational decision making process. Friedman argued instead that people should be thought of as rational decision makers who make plans about lifetime spending, and theories should be judges by their predictive power rather than their realism.
In 1958, the economist A. W. Phillips made prevalent the idea that there is heavy correlation between inflation and unemployment. Economists began to widely accept the concept that high inflation is correlated with low unemployment and low inflation is correlated with high unemployment, until Friedman pointed out that high inflation is only a temporary remedy to high unemployment; the employment rate may decrease for a while, but in the long run, it will rise and inflation will also remain high. This theory was developed through the application of the rational decision making of the Economic Man and was tested and proven true by the period of high inflation in the 1970’s