Essay/Term paper: Milton friedman

Essay, term paper, research paper:  Economics

Milton Friedman


Milton Friedman is known as one of the top economists in the world. He
has a Ph. D. from Columbia University, won a Noble Memorial Prize in economics
and has also been awarded many honorary degrees by other Universities in the
United States. As you can tell, Milton Friedman has played a significant part in
helping to solve the economy problems of the world. You've probably heard all
about his accomplishments and awards he has received, but what about how Milton
Friedman played a very important role in helping us get into a huge national
debt? This paper will discuss how Milton Friedman played a negative role in our
economy.
When the Great Depression hit worldwide, it was up to the economists to
explain it and to devise a cure for it. A person named John Maynard Keynes came
up with an explanation to the economic slump that was so simple people did not
think it would work. Keynes explanation was something like this; in a normal
economy, there is a high level of employment, and everyone is spending their
earnings as usual. This means there is a circular flow of money in the economy,
as my spending becomes part of your earnings, and your spending becomes part of
my earnings. Suppose something happens to alter consumers confidence in the
economy. Worried consumers may then try to weather the coming economic hardship
by saving their money, but because my spending is part of your earnings, my
decision to hoard money makes things worse for you and you, responding to your
own difficult times, will start hoarding money too, making things even worse for
me. So actually, everything is related. People hoard money in difficult time s,
but times become more difficult when people hoard money. That was basically how
Keynes explained the recession. He also came up with a solution to it.
The cure for this, was for the central bank to expand the money supply.
Keynes said, "by putting more bills in people's hands, consumer confidence would
return, people would spend, and the circular flow of money would be
reestablished(Keynes, 232)." That was the cure and explanation to the recession,
but what about the depressions? Keynes believed that depressions were recessions
that had fallen into a "liquidity trap(Keynes, 240)." A liquidity trap is when
people hoard money and refuse to spend no matter how much the government tries
to expand the money supply. In these circumstances, Keynes believed that the
government should do what people were not, basically, spend.
In seven short years, under the Keynesian policy, the U.S. went from the
greatest depression it has ever known to the greatest economic boom it has ever
known. The success of Keynesian economics was so astounding that almost all
capitalist governments around the world started using it. And the result was the
extinction of the economic depression! Before World War II, eight U.S.
recessions worsened into depressions (1807, 1837, 1873, 1882, 1893, 1920, 1933,
and 1937). Since World War II, under Keynesian policies, there have been nine
recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92
), but not one has turned into a depression. The success of Keynesian economics
was such that even Richard Nixon once said, "We are all Keynesians now(Keynes,
289)."
Well, that was the theory the governments were using at the time to
control the economy. Obviously there were some people who objected against use
of this theory. One of them was Milton Friedman.
He believed that the only function the government should be allowed is
to control the circulation of cash. Although he accepted Keynes' definition of
recessions, he rejected the cure. He believed that the government should butt
out of the business of expanding or contracting the money supply. It should keep
the money supply steady, expanding it slightly each year only to allow for the
growth of the economy and a few other basic factors. Inflation and unemployment
would adjust themselves according to market demands. In other words, Milton
wanted the government to keep the money supply steady and only increase it by 3-
5 percent each year to allow growth for the economy. Inflation and unemployment
would supposedly adjust themselves to the market demands, thus giving the
economy low inflation and high stability. He called this theory Monetarism.
Milton preached Monetarism for a long period of time until it was finally tried
in Great Britain during the 80's. His theory was a big disaster. Milton's theory
did not work. For almost seven years, the Bank of England tried its best to make
it work. According to monetarist theory, the British economy should have enjoyed
low inflation and high stability. But in fact, it went berserk. The economy sank
into deep recession. Although inflation came down, this was at the price of
rising unemployment, which soared from 5.4 to 11.8 percent. Between 1979 and
1984, manufacturing output fell 10 percent, and manufacturing investment fell 30
percent. Eventually, the Bank of England had to abandon monetarism, which it did
in 1986. During this time period, Milton was an advisor to Ronald Reagan. He had
also convinced Reagan to try out his theory. Well, under the Monetarism policy,
government borrowing and spending exploded under Reagan, with the national debt
rising to $3 trillion by the time he left office. Paul Volcker, Chairman of the
Federal Reserve Board, battled inflation during the severe recession of 1980-82
through the Keynesian method of raising interest rates and tightening the money
supply. When inflation looked defeated in 1982, he immediately got rid of the
interest rate and flooded the economy with money. A few months later, the
economy came to life, in a recovery that would last over seven years. The
American experience was in direct contrast to Great Britain's. As a result, most
economists abandoned monetarist theory.
In the end, Milton's Monetary theory was proven unfeasible. Instead of
helping fight the recession, Milton helped put us in it. After reading this
paper, one would think that Milton Friedman is a bad economists, but the truth
is, he is a highly intelligent man. Even though he was partly responsible for
putting our economy into a recession during the Reagan administration, he is
also responsible for helping our economy through many other hardships. Although
Milton Friedman is considered as one of the worlds greatest Economists, we all
make mistakes sometimes right?