Great Economical Thinkers: Milton Friedman

Great Economical Thinkers: Milton Friedman

Milton Friedman [5] (1912 – 2006) was an american economist who won the Nobel Prize for Economics (1976) for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. One of his greatest contributions was the “Theory of the Consumption Function”. He said that consumers will change their consumption spending, based upon long term perceived income changes. Income consists of a permanent (anticipated and planned) component and a transitory (windfall gain/unexpected) component. In the permanent income hypothesis model6 , the key determinant of consumption is an individual's lifetime income, not his current income. Permanent income is defined as expected long-term average income. Assuming consumers experience diminishing marginal utility, they will want to smooth out consumption over time, e.g. take on debt as a student and also ensure savings for retirement. Coupled with the idea of average lifetime income, the consumption smoothing element of the PIH predicts that transitory changes in [6] income will have only a small effect on consumption. Only longer lasting changes in income will have a large effect on spending. A consumer's permanent income is determined by their assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income. A worker saves only if they expect that their longterm average income, i.e. their permanent income, will be less than their current income. His teachings broaden in 3 main areas: 

1. Money supply drops prices in the long term: he proved in his book, “A monetary History of the United States”, that if you change the money supply, prices almost have a complete relation to it. If you decrease the money supply prices tend to drop, and if you increase it prices tend to rise. Keynes, on the other hand, had a focus on the income/demand side of the equation, and said that printing more money would equal more output. He referred really to “nominal” output, but not “real” output. The only thing that can drive “real” output is the foundation to build an economy upon. It needs clean capital, human labour, human knowledge and the like. You can’t just turn on a printer press and create more “real” output (this is called “printing money”, the excess of it creates fiat currencies). In the short term, Keynes is right, but in the long term you need to have fundamentals that back-up the economy and the currency. 

2. The most important asset that a nation can have is Human Capital: countries like Japan, Singapur, Hong Kong, don’t have any natural resources but are in the top economic charts. On the other hand, there is countries with abundance of natural resources which don’t have much human capital so they cannot develop their resources for themselves, and a lot of times the value of the commodity leads the country (the case of oil nations, for example). 

3. Freedom is a result of a non-equilibrium chart: most of societies have been born in poor, tyrannical, and oppressive conditions. We enjoy freedom now in many countries but we don’t take into account that most of our histories have been oppressive, and when we take that into account it starts to make a lot more sense. It takes a long time for ideas of freedom to come into action. There is no guarantee really that there will be freedom in the future, there will always be people that want to get rich at the expense of other people’s work and labour.
Milton Friedman also refered to the lack of poverty in Scandinavia when a scandivavian economist told him "in Scandinavia we have no poverty", to what Friedman answered "that´s interesting, because in America amongst Scandinavians we have no poverty either".[7] The poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans.
Milton Friedman was a genius economist, and even if his ideas sometimes conflicted with Keynes, they did not necessarily oppose each other. Next… Karl Marx and Adam Smith!!! And after that... a discussion about why Socialism failed, and what happens in the long run to socialist countries. 

https://en.wikipedia.org/wiki/Milton_Friedman
https://en.wikipedia.org/wiki/Permanent_income_hypothesis
http://con4lib.com/the-myth-of-the-scandinavian-socialist-utopia/