Milton Friedman Macroeconomic Definition

Some General Themes in Friedman’s Macroeconomics

Three themes are of central importance to a general understand­ing of Friedman's contribution to macro-economics:

(0 'Money matters'. That is, variations in the rate of growth of the money supply are a primary determinant of the rate of growth of nominal national income. This is the basic proposition of'monetarism'. Be it noted, however, that what Friedman has opposed himself to, in taking this position, is not Keynes's basic theoretical framework per se, but rather the 'vulgar Keynesianism' of the introductory texts, epi­tomized by the income-expenditure and fixprice IS-LM models.

(ii) 'Inflation is always and everywhere a monetary phenom­enon'. Friedman does not deny that 'real' factors (e.g. union monopoly power) may sometimes affect the course of money wage/price movements. It is the positive burden of his contention, however, that the primary prox­imate determinant of inflation is the rate of growth of the money supply relative to the rate of growth of real aggregate output. (iii) The long-term horizon of decision-making. Themes (i) and (ii) are well-known components of Friedman's intellectual brand-image (the catch-phrases summarizing them are in fact of his own coining). A less recognised, but fundamental, theme of Friedman's work in macro-economics is the importance that he accords to the influence of both past experience and future expectations upon behaviour in the present. This underscores his use of the concept of per­manent income in his analysis of the demand for money and the consumption function, and his stress upon the role of price expectations in the explanation of inflation. On this point there is again a fundamental correspondence and continuity between Keynes' and Friedman's work, as the General Theory may be seen as a (short-run) model 'of an economy in which behaviour is governed by expectations about the future' (Johnson, 1961). However, Keynes pro­vided no formal analysis of the formation of expectations, whereas Friedman has been concerned centrally throughout his work to formalize the systematic influence of past experience upon anticipations of the future, and the manner in which the latter thereby influences behaviour in the present.

Some ‘Loose Ends’

Friedman's work in this area represents a deeply impressive contribution to the explication of macro-economic processes. There are, however, some loose ends in the macro-economic 'paradigm' which Friedman has provided us with.

First, in his attempts to provide an overall theoretical perspec­tive in which to view his work Friedman (1970a, 1971) erects a theory of nominal income movements, which ignores the import­ant question of the division of this magnitude into price and output responses in the short-run. Many (e.g. Johnson, 1971) would see this as a significant lacuna in Friedman's macro-economic framework.
Secondly, there are difficulties in reconciling Friedman's thesis of the long lead of money over nominal income with his permanent income analysis of the demand for money. The problem here, as Thygesen (1977) has noted, is that the latter hypothesis implies that the impact effect of monetary change on nominal income is large, which seems inconsistent with the 'long lead' hypothesis.

Thirdly, Friedman's whole work is open to the charge that, far from being 'anti-Keynesian' in inspiration, it is in fact of the same genre and suffers accordingly from the same basic defect of being too aggregative in nature, and of ignoring the micro-economic impacts of monetary change, as analysed by Hayek and other 'Austrian' economists. The connection between movements in the general price level and the distribution of relative prices is certainly something of a loose end in Friedman's (1977) analysis of the positively-sloped Phillips curve (Burton, 1980).

Fourthly, Friedman's work on inflation is concerned primarily with the proximate causes of that phenomenon, and leaves open the question of the identity of the so-called fundamental de­terminants of inflation - the causes of monetary growth.8 On this latter question Friedman is apparently an eclectic, arguing that the political forces causing monetary growth vary widely from circumstance to circumstance (Friedman, 1970c, p. 24). Reading between the lines of his Nobel lecture, it is also apparent that Friedman (1977) himself feels the identity of the fundamental determinants of inflation to be an important and unanswered question, for he there records the view that the application of public choice theory will constitute the next major stage in the evolution of inflation theory.
Loose ends certainly remain in Milton Friedman's macro-economic framework, as it currently stands. Such is the import­ance of the questions that these lacunae give rise to, however, that it might be said that he has provided us with an agenda for the future of macro-economic research.