Milton Friedman's Ideas and the Current Economy
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Milton Friedman is best known as the founder of monetarism - a new economic doctrine. The ideological roots of monetarism go into the economic theory that provided by market competition, and price flexibility in wage rates leads to the fact that fluctuations in aggregate spending affect the price of products and resources, and not on the level of production and employment. Thus, the market system, if it is not subject to government intervention in the economy, provides significant macroeconomic stability.
Understanding the essence of the market economy by Friedman and his crucial aspects is shown in the comparison of the two main types of economies. The market and the command principles are being compared while attempting to answering the questions about the extent to which the market mechanism can be implemented in a command economy, to what extent elements of the command system are allowed in a market economy.
Friedman believes in a more viable market-based system, rather than a command, first of all because the free exchange on which it is based “is carried out only when it is beneficial to both parties” (Wood & Wood, 1990)
The author describes an ideal market economy as a system in which entirely independent individuals follow their own interests and to achieve their goals stand for voluntary and mutually beneficial exchange with each other.
Historical and statistical analysis of the circulation of money of the United States for the period of a century has played an important role in substantiating Friedman assumptions regarding the relationship between the quantity of money in circulation and the number of macroeconomic performance. These studies have allowed to make the following conclusions: price stability is essential; non-inflationary growth in the money supply, and if the price changes are predictable and not highly significant, economic growth can be carried out at the growing; and in falling prices, the relationship between changes in the money supply and those variables to which the mass of money influences remained unchanged. Despite various reasons for the increase, the money supply primary focus their impact on the economy - from changes in the money supply to changes in income, and not vice versa.
In the analysis of historical trends in the field of monetary policy author has focused on the study of the relationship between the prices, output and money supply in a long term. The solution of the current problems of economic policy requires knowledge of the relationship between the rate of growth of prices and the level of unemployment (the “Phillips curve”) in the short term. It is about finding out to what extent and within what time frame the policy of expansion of aggregate demand and, consequently, increasing the quantity of money in circulation can and can even lead to a decrease in the unemployment rate.
Friedman's position on the nature of the relationship between the rate of growth of prices and the level of employment was essentially defined by his model of nominal income. The main conclusion of this model can be summarized as follows. Under certain assumptions about the form of a series of macroeconomic functions and adaptive nature of the expectations, equilibrium trajectory of the economy is determined by its basic socio-economic and production characteristics that are commonly referred to as real factors. Only in the event that the expectations of economic agents odds with reality, it can be assumed that changes in the nominal aggregate demand affect real output and employment. In terms of the hypothesis about the natural rate of unemployment, this means that undocumented changes in the nominal demand and prices are due to errors in the forecasts lead to a deviation from the natural rate of unemployment, but this situation can not be active, and as the adaptation of economic entities, which arose deviation of the actual value from the natural rate of unemployment decreases. To maintain it requires more substantial cash "infusion" in the economy, which in the long run, prove to be ineffective, and their only result will be a rise in prices. Thus, Friedman casts doubt one of the pillars of the policy of “fine tuning”, namely that an increase in the money supply in circulation can increase the level of employment (Puttaswamaiah, 2009).
Also, he does not agree with the other, not less weighty thesis that the increase in the money supply in circulation leads to lower interest rates. According to him, the increase of money in circulation usually occurs as a result of transactions in the open market when the Federal Reserve Banks buy government securities from commercial banks, thereby increasing their reserves and creating the possibility of expanding the scale of deposit and issue a check. In this case, the reduction in interest rates (due to the increased market value of the securities) occurs in parallel with the increase in bank reserves. In this case, however, the process is not finished. It defines the end of a set of processes associated with the growth of nominal income and expenditure and the consequent increase in prices, weakening the initial decline percent. Moreover, any continuous policy of monetary expansion, contributing to higher prices, favors the formation of inflation expectations, which increase the interest rate.
Thus, Friedman opposed the stereotype in views regarding the goals and objectives of monetary policy. This, however, does not mean that he downplays the significance of this policy. In contrast, in all the ways of impact on the economy, he gives preference to monetary policy as the most acceptable way for a democratic society intervention in the economy that do not result in excessive government dictate and reduction of individual freedom. Though, he clearly defines the nature and objectives of monetary policy. He advocated the principle of gradualism (gradualism), suggesting that the activities under this policy are slow, calculated for years, and are an insufficienly slow reaction to changes of the conjuncture. The stability of motion of the mass of money the author considers as one of the fundamental conditions for the stability of the economy as a whole. He offered to give up trying to use monetary levers to influence real variables (unemployment rate of production) and as targets of the policy governing the control of nominal variables, first of all prices. Achieving this goal in pursuing Friedman sees “monetary rule” requires a stable and moderate growth in money supply in the range of 3-5% per year.
In accordance with certain strategic installations, Friedman proposes to make some adjustments to the institutional structure of the monetary sphere and in the practice of tactical actions in the field of control over the money supply. First of all, it stands for the restriction of the omnipotence of the Federal Reserve System, for the subjugation of its treasury, in order to ensure the unity of the management of monetary and fiscal policy. As for the specific choice of direct monetary control, recently, Friedman tends to think that growth is not strictly controlled by money supply (or any of its units), i.e. deposit, issue of a check, and the so-called “strong money”, which are the obligations of the U.S. government are the main component of bank reserves and represent the foundation of the pyramid of means of circulation and payment. At the end of a transition period, this rate should be fixed, and the number of different monetary assets will be determined by market forces: the ratio of demand for these types of assets on the part of economic agents (individuals and firms) and their offers by various financial institutions. This recommendation, which is different from the earlier ideas of Friedman advocated strict control of the Federal Reserve System of the money supply, reflects a change in the position of Freedmen on the possibilities of a modern banking system, and the importance of money and the various monetary aggregates in the modern economy. However, this provision (together with his statements in favor of a floating exchange rate and reducing government intervention in the field of foreign relations) corresponds to a fundamental worldviews Friedman to ensure the greatest possible economic freedom.
Himself as a supporter of classical liberalism Milton Friedman identified in 1962 - in his book “Capitalism and Freedom”, where he directly stated that government intervention in the economy at least desirable, but as a rule - leads to disastrous consequences. “14 points” offered by the U.S. government in the book of Friedman, including - the privatization of health care, the creation of the private pension system, etc., are still considered by governments around the world measures acceptable, but achievable only in the deep future. Friedman primarily remains a politician speaker of freedom as an economic category (Krugman, 2007).
Despite the label “conservative” with which he was often caracterized by political opponents, Friedman is much closer to the classical liberalism of John Stuart Mill and Adam Smith, than to the traditionally conservative wing economic doctrine. He believes that he has pursued his goal which is not quite at odds with the aims of modern liberal tide. He says, “A Different approach to economic policy, especially for the uninitiated, stems mainly due to differences in the predictions follow economic activities, and not because of the dissimilarity of the fundamental principles and concepts” (Friedman & Jacobson 1963)
Friedman made a number of proposals on a wide range of issues of public life (some of them can be found in the book “Capitalism and Freedom”). This introducts, for example, a flat income tax, educational vouchers, volunteer army on a contract basis. He proposed a reform of the social system on the basis of a negative income tax (subsidize poor families), as well as the privatization of the pension system. Many of these ideas are already implemented in the U.S. and other countries. Some - reform of the pension system and social - are in the long process of implementation. Others are still on the agenda.
It should also be noted that being a consistent liberal, Friedman did not deny the role of the state where it is needed. This idea does not in the least attributed to the implementation of market reforms and institutional reforms, particularly in the financial sector.
Monetarism was a success its followers developed projects from the dramatic elimination of states. The piggy bank monetarism is the experience of overcoming crises in some Latin American Countries, and assist economic recovery in Israel. More or less consistent use of monetarist prescriptions allowed Hungary and Poland, to create the initial conditions for market competition. The concept of monetarism was adopted by international economic organizations, particularly by the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). Last moved to the calculations and economic comparisons of countries and regions with the use of the official exchange rates on M. Friedman proposed a “natural” rate. The economic policy of monetarism proved itself in many Western countries and the countries of Eastern Europe, such as Poland.
Friedman is one of the most influential economists-theoreticians of the XX century. He combined the qualities of an outstanding scientist and ideologist of liberalism. Many years of work in both directions have had an enormous influence on the economic policies of many countries.
In this regard, Friedman is on a par with John M. Keynes, with whom he differed radically in his views on the place of the state in the economy (Puttaswamaiah,2009).
If Keynes is a leading advocate of interventionism, Friedman can be considered chief apologist for the free market and a critic of government intervention in the economy and other areas.
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