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Development of Economics Thought



Introduction

One of the most significant figures in the field of the economical life and development of the new theories of the 20th century Milton Friedman was first to present a new idea of the economic development and the main directions in its spreading over the international markets and the market of the United States as one of the most significant and influential. He supported the idea of a free market and honest competition.

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However, he understood those two powers as the main efficient tools of the economic growth of the separate region, country and international market. He has succeeded in presenting and supporting his strategy. Thus, he was an influential figure in the economic theory and practice. These notable ideas made him popular among the scientific community, political leaders, academic community and financial institutions. Professor Friedman was sure that the free market economy together with the free and honest competition would develop market and improve the whole economic situation of the country and the international market as the main perspectives.

His long way to success was not easy and required a lot of time and efforts to achieve his aim. He was the follower of the Chicago school of economists, where he has been researching and studying the economic theory for more than 30 years. Friedman was a representative of the mercantilism views and was a member of so-called second generation of the Chicago school. He determined the future direction in research of the monetary policy and the main tools of the stabilization and control over this sphere of financial interest. Friedman showed the importance of the self-regulation of the economy with a limited influence from the side of the government. He was an exception for his time. The ideas he presented to the community were rather difficult to understand in those times. They brought a new light to the old knowledge and that was the reason why they did not find a strong support of the economic society of that period. His ideas were developed and acquired a proper understanding only in few years along with the development of the economic knowledge and practice. His views are rather popular now and they find strong support from the side of today’s scientists.

The main aim of this essay is to present the information about the main periods of life of the famous economist presented above and to point out the most important moments in his private and professional life. The next task that will be fulfilled in this paper concerns the main moments, views and positions that cause the presentation of his specific ideas. We are going to research and analyze the main aspects concerning the development of his professional views on the economy and the basic elements that play a significant role in the development of a separate country or the global market. Thus, he was the follower of the first generation of the Chicago school and his ideas were partially borrowed from the ideology that took place before.

The main part of the presented paper is devoted to the discussion of Friedman’s ideas, views and theories and their direct implementation in the economic development and building of new financial perspectives and impact on the modern economy. The main ideas and concepts will be found in the body of the essay together with the description and implementation of them in the present life. This information will be presented in the last part of the essay and followed by a short list of used literature.

Life and Time of Milton Friedman

Biography

Milton Friedman was born in New York (USA) in a Jewish family, who emigrated from Ukraine in the 1920th. In 1928 Friedman graduated from Rahway High School with excellence. The next stage of his life was connected with the entrance to the faculty of mathematics at Rutgers University. This was actually the first stage that led to his high interest to economy and its influence on the general life and well-being of the country. High influence of the professors in the economic field convinced Friedman to continue his education and make career in this sphere. However, this was not an easy task as it required a lot of efforts to succeed in this area. In 1933, he obtained MA degree in Economics at the University of Chicago and it became a hot point in his professional life.

Professional career of Milton Friedman started right after his graduation from the University of Chicago. In 1934-35, when he was working as a research assistant with Professor Schultz on the demand theory, he began to pay maximum attention to all the information that was relevant. After some time, he tried himself in different spheres connected with economy. Moreover, at certain periods of his life, he was working for the National Resources Committee (1935), the National Bureau of Economic Research (1937), taught Economics at the University of Wisconsin–Madison (1940), and developed taxation policy for the Federal Government (1941-43). This experience gave him prosperous opportunities to develop his strategic views on the economic processes that took place in the United States of that period.

The most significant event in his life was connected with the employment of Milton Friedman that was offered to him in 1946 by the University of Chicago. He was a teacher of the economic theory for the next 30 years in the mentioned university. It is important to notice that the biggest part of his life was spent exactly in this university and he got his ideas during that period of his life. After conducting rather difficult researches, he came to an idea to establish ‘second-generation’ of the Chicago school of economics.

After a long period and having written the academic papers and conducted the research work, he presented a range of his works that concerned different aspects of economy and monetary policy as a specific subject of his research. In 1963, he published A Monetary History of the United States, 1867–1960, the book that provided the basis for the recovery of the monetary theory as an alternative to Keynesian approach.

Friedman also played a notable role in the economic policy of the United States. For a few years, he has been occupying one of the most significant places in the governmental mechanism. He was appointed an economic adviser of Barry Goldwater (Republican candidate) in 1964 and an unofficial adviser of President Ronald Reagan in 1980s. Besides, he gave advice to a lot of other political leaders in other countries, mainly in Eastern Europe, Asia and South America. His ideas were spread far beyond the borders of the United States and now they are used in a huge range of countries as the main classical economic theories.

Moreover after the retirement, Friedman participated in a TV program and created a series of discussions called ‘Free to Choose’. There, he presented his main ideas on economics and society. However, this was an essential part of his social work that concerned ordinary people and their role in the economic development of the country and global market.

In 1976, Milton Freidman was rewarded the Nobel Memorial Prize in Economic Sciences for his essential role in the development of economic science and deep research and implementation of knowledge that he had gathered. His scientific knowledge presented in a number of works is considered the economic treasure of nations.

Demand – Time before Friedman’s Ideas

Friedman’s ideas are considered to be some kind of innovations that were presented to community much before it was ready to accept such kind of strategies. However, his views and Chicago school of economics are often summarized as the ‘neo classical school’, which continued theories presented by John Maynard Keynes. This provision could be easily seen in the main works of the mentioned scientist. Keynesian economists proved that the public sector ought to intervene in the economy through fiscal and monetary measures. This idea was rather relevant to the ideas that were presented by Friedman before.

However, these theories more appreciated a fiscal policy which was necessary but in many cases far not that effective as monetary intervention. There is a significant difference between these two economic strategies. Another deficiency of this approach was connected with the fact that they prioritized full employment and believed that it could be reached by strict government policies. There are two obvious forms of the governmental control and participation in the economic policy of the country or global market: partial participation and minimum intervention.

Later, Friedman has shown that there is always a natural level of unemployment, which cannot and should not be overcome by any measures. However, the global well-being is just a utopia idea that is not relevant to the present reality. Some economic categories should stay without any significant changes and only in this case, some level of stability can be achieved and predicted due to the previous research and analyses. The situation that was previous before the ideas presented by Friedman have nothing in common with the progressive development of economy and future perspectives. His theories put the beginning to the new era of the economic strategies and monetary policy as a tool of market regulation.

Supply – First-generation ‘Chicago School’

Most ideas formulated by Milton Friedman are based upon the ‘first-generation’ Chicago school of economics (also called ‘neo classical school’) that existed in the 1920-30s. Rothbard was pointing out that Friedman was ready to make some essential changes in some of the existing approaches (Rothbard, 2002). The changes that took place in the Friedman’s position were obvious and based on the economic school of the 30th. He also provides the main ideas of the ‘first-generation’ Chicago school, which were summarized by Simons in its paper ‘A positive program for laissez faire’ (Rothbard, 2002). These ideas include such aspects:

  1. Ensuring the free-market and the concept of a free and honest competition though reorganization of large corporations into a huge number of small actors which cannot influence the market and prices. However, these players have no power to change the whole situation, but their initiative has much influence on the future possibilities and perspectives for the development of local and global markets;
  2. Constructing a severe income-tax system that would equalize income across economy;
  3. Supporting government expansion at recession time that should stabilize the economy by fiscal and monetary measures. This was the idea that had already been presented by the Keynesian theory. The control of government over the financial resources is the main aspect that can change the whole economic situation. (a ‘proto-Keynesian’ approach).

Friedman totally supported the theory of free-market and the concept of free, honest and perfect competition. However, he strictly opposed the system of tax exemptions showing their inefficiency and advocated the equal income tax scheme in the economy. He also invented the withholding tax. Sometime after, he started to believe that this kind of invention could not be the part of the reality that he could not find apologies for. Besides, Friedman has shown superiority of the monetary policy over fiscal measures and, thus, modified the third idea of the ‘first-generation’ Chicago school of economics. His ideas were like the mixture of certain aspects, ideas and positions that were used only in the part that was relevant to the period of time. Nevertheless, his theories have sense even in the conditions of present development of countries and their entrance and participation in the market relationships.

Ideas and Theories of Milton Friedman

Milton Friedman’s main idea is rehabilitation of monetarism as the primary policy for governments to act in critical situations. However, this policy is rather efficient in the ordinary periods.

Due to the Friedman’s vision, there is no need to use it too often. Thus, it is a temporary idea that works only when there are practical conditions existing in a certain period of time.

This idea is discussed in most of his works and most fundamentally proved in ‘A Monetary History of the United States, 1867–1960’ that was published in 1963 in cooperation with Anna Schwartz. Examining the history of the United States, Friedman has shown that money supply plays a superior role in the determination of the levels of output and consumption in the short-run, but turns into price effects in the long-run perspective. There is a strong need for the creation of economic plan and strategies before the usage of his concept. It is obvious that some conditions could not be a part of the monetary control over the economic development. Further, he concluded that a low-valued constant increase of the money supply in the economy is a necessary measure to stimulate the output and can be more effective than speculations with the levels of the governmental spending and investment.

Summary

Friedman used the Great Contraction (depression) 1929-33 in the United States to illustrate the importance of the monetary policy and consequences of its inappropriate usage. He found out that there is a direct dependence between the monetary policy held in the country and the level of the economic well-being of the whole country (Stains, 2006).

At the time of high demand for money, the Federal Reserve had followed deflationary policy and contracted the money supply by one-third. This has worsened the situation many times and resulted in a Great Depression instead of a slight recession in the economy. In this paper, Friedman also supported the idea that the monetary policy could prevent any time of economic crisis. However, this action requires a detailed plan of actions and proper organization. There is no element in the economic system that could exist independently from the environment.

All the aspects that have much influence on the economy could be contained into a certain base that have a destructive influence on trade, international relationships and economic progress of the country on the international market. Before implementing any strategy into life, it is better to control all the aspects that could play role in this system. The situation that was previous to the ideas presented by Friedman has nothing in common with the progressive development of economy and future perspectives. His theories put the beginning to a new era of the economic strategies and monetary policy as a tool of market regulation The ideas presented by Friedman quiet long time ago are widely used in the present economy. Thus, these ideas are oriented on the development of market and trade relations occupy the main position in the global relationships of the world (Friedman, 1968).

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