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 times, 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?
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