The first question is why Friedman was called monetarist. The problem begins with the Great Depression of the 1930s. From 1929 to 1940, the United States experienced the worst depression of the 20th century: industrial output fell by half, foreign trade by 70 percent, unemployment increased by more than 60 times... The depression did not end until the outbreak of World War II. Economists at the time debated the causes of the Great Depression: some blamed it on the "Black Tuesday" crash of frenzied selling, others on high taxes on foreign trade, and others on insufficient government spending. At that time, the opinion was that the first two arguments were not reliable: because the stock market and foreign trade were only small parts of the economy, the impact on the overall economy was not as big as it is now, and were only minor factors at best. The last view, dominated by Keynes's popularity and the success of a series of economic policies, was that Roosevelt gradually increased government spending to stimulate the economy. With the advent of World War II, government spending soared and the U.S. economy emerged from the Great Depression. By 1941, unemployment had fallen below 11 percent, and Keynesianism was widely praised for its triumph.
It doesn't seem to have much to do with Friedman, and it didn't up to that point. Friedman joined the National Bureau of Economic Research in 1937, where he worked with an economist named Anna J. Schwartz to analyze data on the American economy. And wrote a book called A Monetary History of the United States. There is a different argument, backed up with ample data, that America's great Depression was caused by the Fed's monetary tightening. Friedman and Schwartz show that the amount of money in circulation, as well as bank deposits, both shrank by almost a third between 1929 and 1933. If money supply and savings are insufficient, banks cannot cope with simultaneous demand for withdrawals and loans.
What's going on with this theory? This requires a simple understanding of the operation of the following commercial banks: The essence of commercial banks is to take depositors' money to lend, earn interest margin, left hand to right hand to collect money business, very simple. However, the biggest problem in practice is the withdrawal of depositors: for example, if a depositor has a deposit of RMB 100 million, according to the usual estimation, the maximum net withdrawal will be RMB 10 million, so you keep RMB 15 million and then lend out RMB 85 million. However, the amount of withdrawals varies every day. If a group of customers suddenly come one day and need to withdraw 20 million yuan, the firm will be worried: the 85 million yuan loan is not due and can not be returned, and there is not enough cash to pay the customers, what to do? There were only two options left. One was to find a way to raise the money, and the other was to borrow money to pay the customers' withdrawals and then pay them back later. There are three ways to raise money: by asking other banks to pay back their loans early, by withdrawing their deposits from other banks, or by selling their investment positions. There are two main channels for borrowing money: interbank lending (borrowing from other banks) and the discount window provided by the central bank (borrowing from the central bank). Both, of course, pay interest: interbank lending rates are generally set by the lending market, whereas discount window rates are set by the central bank, and money borrowed counts toward the total amount of money in circulation.
With that in mind, It's easy to understand what Friedman said: Firm deposit is reduced, if maintaining the loans, certainly will will borrow more money, but all the businesses are facing the same problem, interbank obviously pay higher interest rates, and the central bank cut money in circulation, so you can learn from the discount window to get the money also decreased, so two ways to go, have to adopt a way of raising money, But whether it's asking other banks to prepay or withdrawing their deposits from other banks, it will put more pressure on other banks. The selling of invested securities will inevitably lead to a decline in the face value of securities, which will also affect the fundamental data of banks, causing depositors to shake their confidence and further reduce their deposits. These factors add up and a vicious cycle begins. The result of this cycle is lower and lower credit, less and less money for those who need it, and more and more economic stagnation.
Friedman and Schwartz argued that if only the Fed could increase the money supply, it could break this vicious circle and get the economy back on track. Friedman recommended that Congress pass legislation to force the Fed to stabilize the money supply, which should grow at an annual rate of 3 to 5 percent to maintain steady economic growth. This is why Friedman was called a "monetarist" macroeconomist.
Ok, the second question is where Friedman got his "liberal" label:
"A Monetary History of the United States" came out very late, in 1963, and it didn't have much impact when it came out. Keynesianism prevailed at that time, Milton friedman this pagan people it's not a big market, at that time, that is, the economics profession a slightly more experienced economists, that economists have no one thousand and eight hundred in the United States, was not a bit strange, but in the near future, the opportunity came, friedman became economists over soon.
During this period, the Keynesian popular for more than a decade, phillips Curve (Philip Curve, a kind of think negatively correlated with unemployment and inflation relationship Curve) has became a magic weapon to solve the economic crisis: unemployment is high, quickly increased government spending, stimulate the economy, the inflation, the unemployment rate is down. But Friedman was not convinced. In 1968 he and his colleague Edmund Phelps wrote articles arguing that "markets have a 'natural rate of unemployment,'" where government stimulus spending is temporary and labor markets stabilize in the long run. Instead of reducing unemployment in the long run, excessive government investment will lead to long-term inflation and unemployment will bounce back.
This view was not appreciated at that time, but in 1973, a new oil crisis appeared. Keynesian economists tried to rescue the economy with "government spending" again, but unfortunately failed. They found that the economy was in a state of "stagflation" : Employment and inflation are high at the same time, and believers in the Phillips curve are stunned: if government spending increases, some unemployment will be reduced, but inflation, already high, will rise further. If government spending is reduced, inflation will not rise, but employment will continue to rise, just like pigs looking in the mirror. Only then did economists around the world exclaim that Friedman was right, that markets have a natural rate of unemployment, and that government spending should not dictate it. Friedman is great! Keynes, Philip, etc are big liars and should be cut to pieces... Friedman was awarded the Nobel Prize in Economics in 1976 for his contribution to the "natural rate of unemployment." (His co-inventor, Michael Phelps, didn't add another until 2006.)
Friedman was instantly the victor, and Keynesianism was swept into the corner. The smart guy didn't rest. In 1980, he and his wife published a book called Freedom to Choose. The book introduces the already cliched theory of market economy. This book is for the mass, so Mr Friedman did not pull the arrow - ah like gobbledygook, model content, there is no even to carefully explain why market economy is right, where is the advantages and began to talk about their own content, what is the root of all market, market economy makes the rich make money also bring benefits! The government is always wrong. The government is too powerful and it messes up everything.
At this time the Stagflation period of the United States just out of stagflation quagmire, people experienced unemployment at the same time prices are still uncontrollable, the heart that dissatisfaction ah, see what all dislike, heart said: it is the government's fault, it is you who ruined the economy! Screw it up and leave it! After all these years! Nixon, didn't you say you were practicing Keynesian economics? Look what Keynesianism has done to the economy! The brick home calls the beast to eat excrement! What NDRC sasAC is bullshit ah! (Oh, no, we don't have these departments -- they're pretty much the same, government is bullshit!) A: wow! Look how well Friedman writes! How right! They say the government is crap. It's bullshit! What? No proof that a market economy is good? Can I be wrong about a Nobel Prize winner? He's the chairman of the President's Council of Economic Advisers. Can you be wrong? They're talking about the iron law! We want to be free! The government can't do anything! (10,000 words omitted below).
As a result, Friedman's success in the folk was much greater than that of Arrow, Debreu, Hayek and Samuelson. He became famous for attacking the government at a time when everyone was complaining about it, following the heart of the public. He later took this to the extreme with Capitalism and Freedom, a book that attacked the SECURITIES and Exchange Commission, the Food and Drug Administration and a long list of government agencies as unnecessary and markets unregulated. His books were so influential that economists in the United States, Britain, many third world and even The Soviet Union were influenced by the slogan books. Friedman was labeled a liberal.
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