Milton Friedman
Citation: For his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.
The key idea
Inflation is always and everywhere a monetary phenomenon. The permanent-income hypothesis: consumption tracks permanent income, not transitory shocks. The expectations-augmented Phillips curve: there is no long-run trade-off between inflation and unemployment.
The explanation
Friedman's A Monetary History of the United States (1963, with Anna Schwartz) showed that the Great Depression was made into a catastrophe by monetary contraction. His Phillips-curve work argued that policymakers who try to exploit short-run inflation-unemployment trade-offs are eventually defeated by adjusting expectations. The permanent-income hypothesis explained why temporary tax rebates produce smaller consumption responses than permanent tax changes.
Why Africa should care
Most African central banks ran into Friedman's Phillips-curve lesson the hard way through the 1980s and 1990s — Zimbabwe and recently Nigeria are textbook cases of the monetary-inflation link. Kenya's 2011-12 inflation episode (CBR raised in stages to 18.00% by December 2011, with twelve-month CPI inflation peaking at 18.31% in January 2012) was preceded by sharp monetary expansion and exchange-rate pressure, just as Friedman's framework would predict. The permanent-income hypothesis explains why cash-transfer-program impacts on consumption depend on whether recipients expect transfers to continue.
How to use it
Before declaring an inflation surge 'imported' or 'supply-driven', check the monetary aggregates. M3 growth above nominal-GDP growth for sustained periods is the Friedman flag.
Watch out for
Friedman's monetarist policy prescription (target a constant money-supply growth rate) was abandoned by central banks after the velocity of money became unstable in the 1980s.
Canonical works
- Milton Friedman and Anna J. Schwartz (1963) "A Monetary History of the United States, 1867-1960" Princeton University Press
- Milton Friedman (1968) "The Role of Monetary Policy" American Economic Review
- Milton Friedman (1957) "A Theory of the Consumption Function" Princeton University Press
More from Foundations · 1969-1979
- 1969Ragnar Frisch and Jan Tinbergen
Economics is a measurable science. Build dynamic equations of the economy, estimate them with data, use them to forecast and design policy.
- 1970Paul Samuelson
Economic theory has the structure of physics: optimisation under constraints, with comparative statics and dynamic stability following from the same maximisation principles.
- 1971Simon Kuznets
Growth is structural transformation, not a single line on a chart. Inequality follows an inverted U as economies industrialise — the Kuznets curve.
- 1972Kenneth Arrow and John Hicks
When can the totality of competitive markets simultaneously clear, and when is that outcome socially efficient? Arrow-Debreu (1954) proved existence; the First Welfare Theorem proved efficiency — under restrictive assumptions.
- 1973Wassily Leontief
An economy is a matrix. Each sector produces output by buying inputs from other sectors. Once you know the matrix of inter-industry flows, you can compute the total impact of any final-demand change.