Milton Friedman the Most Influential Economist of the 20th Century

Milton Friedman -- a Living Economic Legend

Even those individuals who consider him to be a negative influence upon economic theory cannot deny the impact of Milton Friedman had in deflating the once-uniform confidence economists invested in Keynesian theories of macroeconomics after Keynes' theories of government spending were credited with ending the Great Depression. Unlike Keynes, who advocated sharp, short-term increases in government spending to ameliorate the effects of a recession, Friedman argued against government intervention in the economy. Friedman claimed that the forces of a free market and the Federal Reserve Bank's gradual, continuous increase in the money supply would promote economic growth and thus counter the dangers of a recession. (Silk, 2005) This was at the heart of Friedman's 1957 contributions to economics, called the "Permanent Income Hypothesis" in consumption, that suggested that the more money existed in the economy, the more individuals were willing to spend, in contrast to Keynes' belief that recessions encouraged hoarding, regardless of the money supply, because of the fear of unemployment. ("Milton Friedman," CEPA, 2005)

Friedman was awarded the Nobel Prize in 1976 "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy" spanning from his aid with the Marshall Plan to Europe after World War II to his continued influence through academia and government. ("Milton Friedman: 1976 Winner of the Nobel Prize in Economics." The Nobel Prize Internet Archive) Friedman is best known for founding what is known as the "Chicago School" of economics during the 1960s, perhaps one of the better known American "schools" of economics.

The term "Chicago School" is associated with a particular brand of economics that adheres strictly to neoclassical price theory, that prices are far more elastic than proposed by Keynes. ("Milton Friedman," CEPA, 2005) The Chicago School in its economic analysis is profoundly free market in its approach, and "relatively averse" in its methodology to too much mathematical formalism. ("Milton Friedman," CEPA, 2005)

It was "willing to forego careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis" -- in other words, the benefits of government intervention to create a long-term general equilibrium were outweighed by the benefits of the free market in the short-term. Rather than Keynesian fine-tuning, Friedman believed that government economic policy ought to be replaced with iron "rules" of policy - notably his famous "money supply growth" rule, that as the economy contracted the money supply should expand in kind, and vice versa. ("Milton Friedman," CEPA, 2005)

Friedman is also widely respected for his formulation of risk-aversion and risk-proclivity, which assessed how individuals were willing to take economic investment risks -- the greater the payoff, the greater the risk, Friedman said. His theories have also proved influential in his application of evolutionary theory to the theory of the firm, a particularly valuable addition to economic theory because of the profound changes that corporate enterprises have undergone over the 20th century. ("Milton Friedman," CEPA, 2005)