Milton Friedman was a great economist who criticized the Keynesian theory and whose concepts influence the present economic decisions made. He came up with several thoughts on different areas of economics such as consumption, fiscal policy, and monetary policies. His views on economic concepts lead to major debates and also acceptance in the US leading to his role in advising President Ronald Reagan in 1980s on economic matters and even winning Nobel Prize. Some of his concepts and their contribution to the present life are discussed below.
Friedman on consumption concept he came up with the theory that there is permanent income that determines the consumption behavior. The aggregate demand in macroeconomics should be derived from the permanent income as per his argument; temporary income possibly from bonuses and lower taxes does not affect the consumption in the short and long-run. In a case where the government imposes higher taxes affecting the permanent income, the amount used as the disposable income is not affected; instead, it is the savings that reduce. Friedman sees the permanent income as the main determinant of disposable income because it was earlier known. The concept is further supported by the fact that savings are always left at the residual amount of total income after spending.
The Keynesians advocated for government intervention in cases volatility in the business cycle. During times of instability in the business cycle, Friedman advocated for the use of money supply as the right measure in a case of any intervention. He sees inflation as caused by the amount of money in circulation in an economy and during economic crisis a country can overcome it by use of monetarism. To ensure that the business cycle remains smooth and the economy grew steadily, instead of employing fiscal policies, Friedman advocated for a small and steady increase in money supply. The steady increase in money supply and free market operations would minimize chances of rising in inflation and also have an impact in reducing unemployment. The natural rate of unemployment can be reduced and managed by the natural forces of demand and supply, and steady and slow money supply increase can facilitate its minimization.
The market system should be free where prices are determined by the market forces of aggregate demand and supply. Friedman argued that the government should have little or no influence on price determination. As such, consumers and suppliers would not be told on what to sell and buy an in that an economy can remain stable and steady. Friedman believed having a free market give the participants the freedom to choose, which is essential in an economy and ensuring progressive economic growth.
In the modern economy, Friedmans concepts influence a lot the policies made directly and indirectly. The free market establishment in the society has had a lot of influence in determining the prices and in cases where the government intervened, negative economic growth has resulted. For example, during times of increased expenses caused by government policies or unfavorable financial emergencies, such as uninsured uncertainty, savings reduces. The disposable income is not the one that pays for the extra expenses that arise. The behavior in the spending supports the concept of permanent income. The aggregate savings and expenditure in the present economy tend to follow the idea of Friedman making it very applicable. In times of economic crisis, the view that government should not intervene has not been widely applied. But the fiscal policies taken by the government seem not to work efficiently with the alternative of using monetarism a possible solution. For example, the budgetary policies employed to curb the 2008 depression took a lot of time before there was an indication of minimizing the problem.
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