Milton Friedman: Austrian School Economist Or Not?

Milton Friedman was an American economist and statistician who was awarded the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history, and theory. He was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought that rejected Keynesianism. Friedman's work covered a broad range of economic topics and public policy issues, and his books and essays have had global influence.

Friedman was acquainted with the Austrian economist Friedrich Hayek and was familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. However, he did not consider himself an Austrian economist, and in a 1998 interview, he stated that he believed the Austrian business-cycle theory had done the world a great deal of harm.

Milton Friedman's political philosophy

Milton Friedman was an American economist and statistician who advocated for free-market capitalism. He is regarded as the founder of monetarism, an active monetary policy where governments control the amount of money in circulation. Friedman's political philosophy extolled the virtues of a free-market economic system with minimal government intervention in social matters.

Friedman's challenges to what he called ""naive Keynesian theory" began with his interpretation of consumption, which tracks how consumers spend. He introduced a theory that would later become part of mainstream economics and was among the first to propagate the theory of consumption smoothing. During the 1960s, he became the main advocate opposing both Marxist and Keynesian government and economic policies. He described his approach as using "Keynesian language and apparatus" while rejecting its initial conclusions.

Friedman's monetarist theory proposed that money supply changes have immediate and long-term effects. In his 1963 book, A Monetary History of the United States, co-authored with Anna Schwartz, Friedman argued that it was monetary policy, and not a failure of free-market capitalism, that led to the Great Depression. Surveying a century of monetary policy during crashes, booms, recessions, and depressions, Friedman concluded that the Federal Reserve was a main cause of the depression because it curtailed the money supply by 30% between 1929 and 1933. This contraction caused a crash that extended into a depression.

Friedman's political philosophy was outlined in his 1962 book, Capitalism and Freedom, which made the case for relatively free markets to a general audience. In it, he advocated for policies such as a volunteer military, freely floating exchange rates, the abolition of medical licenses, a negative income tax, school vouchers, and opposition to the war on drugs and support for drug liberalization policies.

Friedman believed that the government had two crucial roles: to protect the nation against foreign enemies and to protect citizens against each other. He supported the idea of privatisation of national defence but acknowledged that he had not yet thought of a way to make this possible.

Friedman also supported libertarian policies such as the legalisation of drugs and prostitution. He was also a supporter of gay rights, stating that there should be "no discrimination against gays". He favoured immigration, believing that it had a positive impact on the US economy, but suggested that immigrants should not have access to the welfare system.

Friedman was a strong advocate for floating exchange rates throughout the entire Bretton-Woods period (1944-1971). He argued that flexible exchange rates would make external adjustment possible and allow countries to avoid balance of payments crises. He saw fixed exchange rates as an undesirable form of government intervention.

Friedman's works cover a broad range of economic topics and public policy issues. His books and essays have had global influence, including in former communist states. A 2011 survey of economists commissioned by the EJW ranked Friedman as the second-most popular economist of the 20th century, following only John Maynard Keynes.

Friedman's views on the role of government

Milton Friedman was an American economist and educator, and one of the leading proponents of monetarism in the second half of the 20th century. He won the Nobel Prize for Economics in 1976.

Friedman identifies three primary functions of government:

• Military defence of the nation
• Enforcement of contracts between individuals
• Protection of citizens from crimes against themselves or their property

He believed that when the government tries to rearrange the economy, legislate morality, or help special interests, the result is inefficiency, lack of motivation, and loss of freedom. In his view, the government should be a referee, not an active player.

Beyond these basic duties, Friedman also argued that governments have a responsibility to curb the power of monopolies and provide essential public services that confer broad-based social benefits that could not be efficiently provided by the private sector.

Friedman's support for free markets and free societies was evident in his public policy positions. He advised Presidents Richard Nixon and Ronald Reagan on economic policy, participated in various institutes and societies, and wrote a regular column for Newsweek magazine. He supported flexible exchange rates, a monetary growth rule, school vouchers, a balanced budget amendment, and the decriminalization of drugs. He opposed conscription and various forms of price controls, including the minimum wage and rent controls.

The Chicago School of Economics

The Chicago School's intellectual roots can be traced to the University of Chicago, where Friedman and other leading figures were based. The school's influence extended beyond academia, with several students and young professors mentored by Friedman going on to become prominent economists, including Gary Becker, Robert Fogel, and Robert Lucas Jr. Additionally, Friedman served as an advisor to Republican U.S. President Ronald Reagan and Conservative British Prime Minister Margaret Thatcher.

The Chicago School's opposition to Keynesianism was based on their belief that government intervention in the economy should be minimal. They argued that a free-market system with limited government intervention was more effective in addressing economic issues. Friedman, in particular, promoted policies such as floating exchange rates, privatization, and deregulation, which influenced government policies, especially during the 1980s.

The Chicago School's influence began to wane in the mid-1970s, as they turned towards new classical macroeconomics, which was heavily based on the concept of rational expectations. Despite this shift, the Chicago School's ideas continued to shape economic thinking, and their legacy can be seen in the continued debate and discussion around the role of government in the economy.

Monetarism

Milton Friedman was an American economist and winner of the Nobel Memorial Prize in Economic Sciences. He is best known for his work in reviving interest in the money supply as a determinant of the nominal value of output, or the quantity theory of money. This set of views is known as monetarism.

The theory states that governments can foster economic stability by targeting the growth rate of the money supply. It is a macroeconomic theory that states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. This demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.

Friedman argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. He proposed a fixed monetary rule, called Friedman's k-percent rule, where the money supply would be automatically increased by a fixed percentage per year. The rate should equal the growth rate of real GDP, leaving the price level unchanged. For example, if the economy is expected to grow at 2% in a year, the money supply should be increased by 2%.

Friedman was an opponent of Keynesian economics, criticising Keynes' theory of fighting economic downturns using fiscal policy. He was also a critic of the Austrian business-cycle theory, stating that it had "done the world a great deal of harm".

Friedman's influence on government policies

Milton Friedman was an American economist and educator, and one of the leading proponents of monetarism in the second half of the 20th century. He advocated for free-market capitalism and monetarism, and his ideas have had a significant influence on government policies worldwide. Here is an overview of Friedman's impact on government policies:

Influence on Economic Policies

Friedman's economic theories, known as monetarism, challenged key aspects of Keynesian economics, which dominated the first half of the 20th century. Friedman argued that governments could achieve economic stability by controlling the supply of money in the economy, contrary to the Keynesian view that fiscal policy was more effective. He believed in the importance of monetary policy and low inflation, and his ideas gained traction in the 1970s and contributed to the end of Keynesian dominance in macroeconomics.

The Great Moderation

Friedman's influence on economic policy led to the Great Moderation, a period of price stability in the United States that lasted for 40 years, starting in the early 1980s. While the Federal Reserve did not follow Friedman's proposed rule of targeting the growth rate of the money supply, they recognised the importance of monetary policy in achieving price stability.

Floating Exchange Rates

Friedman's ideas on exchange rates also had a significant impact. He supported flexible exchange rates, and his influence led to the adoption of floating exchange rate regimes by central banks around the world.

Military Conscription

One of Friedman's notable policy victories was the end of military conscription in the United States. He actively lobbied against conscription and served on President Nixon's Commission on an All-Volunteer Armed Force. His efforts contributed to the end of the draft in January 1973.

School Vouchers

Friedman advocated for school choice and the privatisation of elementary and secondary education. He proposed the use of school vouchers, which would allow parents to have more control over their children's education. While this idea has not been widely adopted, some states and localities in the United States have implemented school voucher programmes.

Drug Decriminalisation

Friedman also influenced public opinion and government policies on drug decriminalisation. His famous "Open Letter" to the drug czar Bill Bennett in 1989 called for the decriminalisation of all drugs, arguing that the war on drugs had devastating unintended consequences.

Other Policy Influences

Friedman's ideas also had an impact on other areas, such as taxation, welfare, and business regulation. He advocated for lower taxes, opposed welfare programmes, and criticised government interventions in the economy. However, some of his more radical proposals, such as the abolition of government licensing requirements and the minimum wage, have not been widely adopted.

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