Timeless economics

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Posts Tagged ‘permanent income

Milton Friedman : The Man Who Always Had Something To Say!

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Milton Friedman was one of the most influential economist of the 2the 20thcentury.He was born July 31, 1912 in BroolynNew York of Russian-Jew parents. He finished his college degree in Rutgers University majoring in mathemetics and economics. He took up masters in economics at University of Chicago and his Phd at Columbia University.

Early in his career he held various positions in the government, working at the Bureau of Economic research, the US Treasury Department, and the National resources committee, while at the same time teaching at University of Chicago. These stints in various areas of economics are influential in his works and books on economics.

Friedman was widely regarded as the leader of the Chicago School of Monetary Economics, which stresses the importance of the quantity of money supply as an instrument of government policy and as a determinant of bussiness cycles and inflation. Before Friedman’s monetary theory, government is willing to have a little more inflation as long as there is a reduction in unemployment. Friedman said this is an illusion. Pumping up demand (by hiring more workers who now have wages to purhcase goods) pushed down unemployment, only by fooling workers into thinking that wages had risen relative to prices making them more willing to offer their labor.

Once truth dawned (prices have increased because many are now chasing the same goods) they will demand more pay and unemployment would rise back to its “natural” rate. If government tried to push unemployment below this “natural” rate, in the long run they would suceed only in pushing inflation even higher.

Mr. Friedman also conceptualize the theory of permanent income hypothesis. This theory set forth that people do not spend on basis of what their income happened to be that year but according to their “permanent income” – what they expected to have year in and year out. In a bad year they will dip into their savings, when they had a surplus they would save. This idea together with his work on monetary analysis and stabilization policy earned him a nobel prize in 1976.

One of his economic ideas, a product of the conditon of his era, the NEW Deal era, is that the market is always rational and efficient. Perhaps repelled by the heavy government oversight of financial markets imposed during the new deal era and by the evidence of wide spread irrational behavior by paticipants in the financial markets. He believed that the market will be the one to correct and cure itself and not some form of regulation and legistlation. But today it would seem that the idea is on the wrong side ofeconomic history. To qoute one writer, “The financial crisis that has engulfed the world in the past two years is not just or perhaps even mainly a tale of greed run riot IT IS THE RESULT of an IDEA that failed. The IDEA which over the past four decades become the dominant belief among those generally regarded as the savviest participants in the financial system, was that the market is always rational and efficient. So much for that.

But this does not diminished the standing of Milton Friedman as a giant in the dismal Science of Econimics. His ideas and contribution remains to the day as influential, powerful, profound and relevant.

Sources:

http://en.wikipedia.org/wiki/Milton_friedman

http://homepage.newschool.edu/het/profiles/friedman.htm

http://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-autobio.html

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