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Economist Milton Friedman: Theories & Monetary Policy

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  • 0:03 Milton Friedman
  • 0:45 Free Market Ecomonic Theory
  • 1:15 Stockholder Theory
  • 1:42 Theory of Consumption
  • 2:16 Monetary Policy
  • 3:36 Lesson Summary
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Lesson Transcript
Instructor: Susan Fenner

Susan has an MBA in Management from the University of North Alabama. She teaches online and campus-based Business courses.

Milton Friedman was a highly celebrated American economist and a strong proponent of the free market system. Let's take a look at some of his contributions to the field of economics.

Who Was Milton Friedman?

'If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.' So said economist Milton Friedman (1912 - 2006), one of the most colorful and controversial characters in the history of American economics.

Friedman won the Nobel Prize for Economic Sciences in 1976. He served as an advisor to President Ronald Reagan during the 1980s and he was highly influential in shaping American monetary policy for several decades. In 1988, Friedman received the highest civilian award possible, the Presidential Medal of Freedom, for his dedication and service to the country.

Free Market Theory

Friedman believed in the free market system, where the prices people pay for things are agreed upon by the buyers and sellers with little or no control by the government. Friedman defended his belief against critics by saying, 'A major source of objection to a free economy is precisely that it ... gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.'

Stockholder Theory

One of Milton Friedman's more controversial theories, known as the Stockholder Theory or the Friedman Doctrine, is that a company's only social responsibility is to increase profits for the owners (stockholders), as long as it doesn't engage in deception or fraud. Think about that for a minute. Do you agree with Friedman? Do businesses have any moral obligation to the general public beyond not being deceitful?

Theory of the Consumption Function

Friedman's theory of consumption states that people will make decisions on spending based on what we think our income will be over time, what Friedman called our 'permanent income,' and not just our current income, which may be higher. It's based on the belief that most of us are sensible when it comes to dealing with our money. So, when we receive a little extra money from what might be a temporary source, such as a bonus at work or a temporary tax cut, it doesn't have a huge effect on how much money we spend in the long run. Do your personal spending habits support Friedman's theory?

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