Ruqayyah Snyder
Milton Friedman was an influential economist who advocated for free markets and free societies. He was familiar with the work of several Austrian economists, including Friedrich Hayek, Ludwig von Mises, and Murray Rothbard. While Friedman shared some similarities with Austrian economics, such as a strong faith in markets and skepticism of government regulation, he also had significant differences with Austrian economic theories, particularly their business cycle theory. Friedman once stated that there is no Austrian economics—only good economics and bad economics.
| Characteristics | Values |
|---|---|
| Year of influence | 1998 |
| Type of influence | Acquaintance |
| Type of acquaintance | Austrian economist |
| Name | Friedrich Hayek |
| Other influences | Ludwig von Mises, Murray Rothbard |
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What You'll Learn
Milton Friedman's views on Austrian business-cycle theory
Milton Friedman was a vocal critic of the Austrian business-cycle theory (ABCT), an economic theory developed by the Austrian School of Economics that seeks to explain how business cycles occur. Friedman, a prominent economist in his own right, had a different perspective on business cycles and economic theory, which often put him at odds with the Austrian School.
Friedman's Views on the Austrian Business-Cycle Theory:
Friedman disagreed with the ABCT and believed it to be incorrect and harmful. In a 1998 interview, he expressed dissatisfaction with the policy implications of the theory, stating that he thought the ABCT "has done the world a great deal of harm". Friedman's criticism specifically targeted the Austrians' response to the economic situation in the 1930s. He referenced Hayek and Lionel Robbins, who, according to Friedman, advocated for letting "the bottom drop out of the world" during that period.
Friedman's primary critique of the ABCT was based on his belief in the importance of empirical accuracy in economic theories. He argued that the ABCT did not accurately explain economic recessions as they actually occurred in practice. This view was shared by other economists, including John Quiggin, who considered the ABCT incomplete and problematic. Austrian economist Roger Garrison, however, noted that Friedman's empirical findings were "broadly consistent" with Austrian views, even if they offered a different level of analysis.
Friedman's own economic contributions were significant, particularly his revival of a monetary approach to macroeconomics and his critique of Keynesian orthodoxy. He advocated for free markets and free societies, often clashing with government regulation. Friedman's work with Anna J. Schwartz on the monetary history of the United States has been influential. Additionally, his concept of the permanent income hypothesis is considered one of his more important contributions to economics, although some argue that it is incompatible with the basic forms of ABCT.
Friedman's Views on Central Monetary Authority:
Friedman had strong views on central monetary authority and its role in the economy. In his 1985 presidential address to the Western Economic Association, he reflected on his years of advocating for a monetary "rule," which he eventually came to believe was futile. He argued that there was no basis for expecting those managing the government monetary system to follow such a rule. Instead, he proposed that the central monetary authority should increase the money supply at a constant annual rate, regardless of changing economic conditions.
Milton Friedman's views on the Austrian business-cycle theory were shaped by his belief in the importance of empirical accuracy and his own economic contributions, such as the permanent income hypothesis. He disagreed with the ABCT's explanation of economic recessions and believed it had negative real-world consequences. While he shared some similarities with the Austrian School, such as a faith in markets and skepticism of government regulation, Friedman ultimately advocated for a different approach to economic theory and policy.
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Friedman's relationship with Austrian economists
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 in Economic Sciences in 1976. Friedman was a strong advocate for free markets and free societies, and his work has been a vital resource for those interested in the monetary history of the United States.
Friedman's relationship with Austrian economics and economists is a complex one. There are several similarities and differences between Friedman's ideas and Austrian economic theory. Friedman shared the Austrian school's faith in markets and skepticism of government regulation. However, there are also significant differences between Friedman and Austrian economics. Friedman was a strong proponent of mainstream research methods such as mathematical models and statistical analysis, while Austrian economists tend to reject these methods. Friedman also emphasised economics as a tool for creating scientific predictions that could be tested, which is not a focus for Austrian economists. Additionally, Friedman did not believe in the Austrian Business Cycle Theory, which states that easy money leads to mal-investment, causing a boom and then a bust. Instead, Friedman saw inflation as an effect of increasing the money supply.
Despite these differences, Friedman was influenced by several Austrian economists and had a close relationship with some. One of Friedman's mentors was Arthur Burns, who introduced him to many new ideas, including Alfred Marshall's "Principles of Economics". Friedman also collaborated closely with Anna J. Schwartz, and their work together has been a vital resource for those interested in the monetary history of the United States.
Overall, while there are some similarities between Friedman's ideas and Austrian economics, there are also significant differences in their methodologies and theoretical foundations. Friedman's relationship with Austrian economists was influenced by his mentors and collaborators, but he ultimately developed his own unique approach to economics that combined elements of various schools of thought.
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Commonalities between Friedman and Austrian economics
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, and the complexity of stabilization policy. Friedman was a proponent of monetarism and neoclassical economic thought, and is known for his work on free markets and societies, revival of a monetary approach to macroeconomics, and critique of Keynesian orthodoxy.
Austrian economics, on the other hand, is a historical school of thought that may not be as widely followed today. However, there are some commonalities between Friedman's ideas and Austrian economics. Here is a detailed look at these commonalities:
Faith in Markets and Skepticism of Government Regulation:
One of the key similarities between Friedman and Austrian economics is their shared belief in the importance of free markets and a skepticism of government intervention. Friedman was a strong advocate for free markets and believed that market solutions were often disparaged by social scientists. Austrian economics also generally aligns with this view, favoring limited government involvement in the economy. This commonality is perhaps the most significant overlap between Friedman and Austrian economics.
Monetary Policy and Inflation:
Friedman proposed a monetary "rule" or Gammon's Law, suggesting that the money supply should be increased at a constant annual rate, regardless of economic conditions. He argued that this approach would provide a framework for economic stability and be less open to inflationary excesses. Austrian economics, while having a different perspective on business cycles, also recognizes the role of monetary policy and the potential impact on inflation. Austrian economists often argue that federal intervention in credit markets can lead to recessions and depressions, demonstrating a shared interest in the effects of monetary policy with Friedman.
Critique of Restrictive Policies:
Friedman was critical of policies that restricted entry into certain fields, such as the AMA's policies in medicine. He also noted the heavy regulation imposed on the for-profit hospital industry, which often hindered patient/customer service and profit pursuit. Austrian economics, with its emphasis on free markets, would generally align with this critique of excessive regulation and restrictive policies that hinder economic freedom and market forces.
Influence of Classical Economists:
Friedman was influenced by classical economists such as Alfred Marshall, whose description of economics as "an engine for the discovery of concrete truth" he approvingly quoted. Austrian economics also has its roots in classical economics, with some Austrian economists sharing an affinity for Adam Smith, further highlighting a common ground in their intellectual influences.
While Friedman and Austrian economics differ in several methodological and theoretical aspects, these commonalities showcase areas of overlap and shared principles between Friedman's ideas and the Austrian school of economic thought.
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Friedman's critique of Keynesian orthodoxy
Austrian economics and Keynesian economics are two distinct schools of thought in economics, with Austrian economics being described as a historical school of thought. Milton Friedman is known for his critique of Keynesian orthodoxy, which he started moving away from in the 1950s. Friedman's critique of Keynesian economics was largely influenced by his monetarist views.
Nominal Interest Rates
Friedman rejected the Keynesian view that nominal interest rates are the correct indicator of the stance of monetary policy. In the mid-1960s, he argued that nominal interest rates were rising due to increasing inflation expectations, contrary to the claims of Keynesians like James Tobin. By the 1970s, Friedman's view was vindicated as inflation and nominal interest rates continued to rise, demonstrating that nominal interest rates are not a reliable indicator of monetary policy.
The Relationship Between Interest Rates and Money Supply
Friedman disagreed with the Keynesian explanation that lower interest rates lead to more spending and subsequently higher prices. He argued that if money growth is rapid, interest rates will often rise as lenders expect higher inflation and demand higher nominal interest rates. This, in turn, increases the velocity of circulation, causing inflation to rise even further. Therefore, Friedman proposed that instead of using interest rates, the broad money supply (M2) should be used as an indicator of the stance of monetary policy.
The Natural Rate Hypothesis
In 1967, Friedman outlined the Natural Rate Hypothesis, which contradicted the Keynesian view of the relationship between inflation and unemployment, known as the Phillips Curve. While Keynesians believed that a boom could cause rising inflation, Friedman's view aligned with Irving Fisher's earlier analysis, which suggested that inflationary shocks impact real output.
The Role of Government
Friedman had a strong faith in free markets and was sceptical of government regulation. He advocated for a monetary "rule" where the central monetary authority would increase the money supply at a constant rate, regardless of economic conditions. However, he later acknowledged that this idea was flawed as there was no incentive for those managing the government monetary system to follow such a rule.
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Friedman's views on public policy
Milton Friedman's views on public policy were extensive and covered a broad range of economic topics. He was an advocate for free markets and free societies, and his work has been a vital resource for those interested in the monetary history of the United States. Friedman's views on public policy were heavily influenced by his belief in minimal government intervention in social matters. He was a libertarian and believed in the virtues of a free-market economic system.
Friedman's book Capitalism and Freedom (1962) outlined his position on major issues of public policy. In it, he advocated for policies such as a volunteer military, freely floating exchange rates, the abolition of medical licenses, a negative income tax, and school vouchers. He also opposed the war on drugs and supported drug liberalization policies. Friedman's work on the permanent income hypothesis is among his many contributions to economics, and it was listed as a reason for his Sveriges-Riksbank Prize in Economic Sciences.
Friedman was also critical of the AMA's policies of restrictive entry into the field of medicine. In a 1992 study, he noted that government intervention in the hospital industry had led to heavy regulation, impacting the decisions made by hospital administrators. He proposed supplementing publicly operated schools with privately-run but publicly funded schools through a system of school vouchers. Reforms similar to these proposals were implemented in Chile in 1981 and Sweden in 1992.
Friedman believed that public housing would increase taxes and not benefit low-income people in the long run. He advocated for direct cash instead of public housing, arguing that people would be better off that way. He was also against minimum wage laws, arguing that they would increase unemployment and that employers would not rehire workers at lower pay. Additionally, Friedman supported libertarian policies such as the legalization of drugs and prostitution, as well as gay rights.
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Frequently asked questions
Austrian economist Friedrich Hayek influenced Milton Friedman. Hayek, along with Ludwig von Mises and Murray Rothbard, were some of the Austrian economists whose work Friedman was familiar with.
Milton Friedman was an advocate for free markets and free societies. He was a critic of the Keynesian orthodoxy of his time and is known for his revival of a monetary approach to macroeconomics.
While Friedman was influenced by some Austrian economists, he did not consider himself an Austrian economist. In a 1998 interview, he stated that he believed the Austrian business-cycle theory had "done the world a great deal of harm".
