
14 October 1976
THIS YEAR's ECONOMICS PRIZE TO AN
AMERICAN
The Royal Swedish Academy of Sciences has decided to
award the 1976 Prize in Economic Sciences in Memory of Alfred
Nobel to
Professor Milton Friedman, University of
Chicago, Illinois, USA,
for his achievements in the fields of consumption analysis,
monetary history and theory, and for his demonstration of the
complexity of stabilization policy.
Milton Friedman's name is chiefly
associated with the renaissance of the role of money in inflation
and the consequent renewed understanding of the instrument of
monetary policy. He has given us the terms "money matters" or
even, "only money matters", with the emergence of monetarism as a
Chicago school. This strong emphasis on the role of money should
be seen in the light of how economists - usually advocates of a
narrow interpretation of Keynesian theory - have, for a long
time, almost entirely ignored the significance of money and
monetary policy when analyzing business cycles and inflation. As
far back as the beginning of the fifties, Friedman was a pioneer
in the well-founded reaction to the earlier post-Keynesian
one-sidedness. And he succeeded - mainly thanks to his
independence and brilliance - in initiating a very lively and
fruitful scientific debate which has been going on for more than
a decade. In fact, the macro-econometric models of today differ
greatly from those of a couple of decades ago as far as the
monetary factors go - and this is very much thanks to Friedman.
The widespread debate on Friedman's theories also led to a review
of monetary policies pursued by central banks - in the first
place, in the United States. It is very rare for an economist to
wield such influence, directly and indirectly, not only on the
direction of scientific research but also on actual
policies.
Friedman has carried out a number of studies, which,
scientifically speaking, are both original and weighty, in
support of his analysis of the role of money. His empirical
studies of the relationship between increases in the supply of
money and the consequent changes in incomes and prices are thus
founded on a new formulation of the theory of demand for money or
liquid resources. His findings on the comparatively great
relevance of the quantity theory in explaining developments is,
in fact, built on the premise that the demand for money is in
fact very stable.
From the purely scientific point of view, Friedman's other
achievements are of greater interest than his monetary analysis.
Of primary importance here is his re-fashioning of the theory of
consumption based on the hypothesis that "the permanent income"
and not year-to-year income is the determining factor when
assessing total consumption outlay. He makes the extremely
valuable distinction between the temporary and more permanent
incomes of households; Friedman has demonstrated that a much
greater proportion of the former type of income is saved than the
latter.
Another of the important contributions has been studies of "lags"
appearing in all areas of economic policy. It was Friedman who
coined the terms "observation-lag", "decision-lag" and
"effect-lag" to express a fundamental problem somewhat neglected
earlier - and that is, the right timing for stabilization
measures during a business cycle. Friedman has demonstrated how
both prolonged "effect-lags" and those of varying lengths - of
changes in the supply of money, for example - can have a
destabilizing effect. The conclusion he draws for economic policy
from these findings has been the subject of lively debate, and,
to put it briefly, is that monetary policy should be simplified
and that its goal should be to ensure a long-range stable growth
rate of the supply of money. This view has been accepted to some
extent by a few leading central banks.
Friedman was the first to demonstrate that the accepted
assumption of a simple trade-off between unemployment and the
rate of inflation was only a temporary phenomenon; on the longer
term (more than five years), no such trade-off exists.
Unemployment below a structural level of balance thus leads,
according to Friedman's theory, to a cumulative increase rate in
prices and wages mainly on account of the destabilizing influence
exerted by expectations. Modern ideas about the factors
determining wage structures are very much based on Friedman's
hypotheses on the importance of expectations of inflation.
At the beginning of the fifties, Friedman was a pioneer among
those recommending the reorganization of the international
monetary system based on free rates of exchange. He studied the
theory of the problem but also used empirical studies to assess
how such a system could be made to work. Friedman was among those
who first realized - and could explain - why the Bretton Woods
System with relatively fixed rates of exchange was bound to break
down sooner or later.
His major work, A Monetary History of the United States,1867 - 1960, is regarded as one of Friedman's most profound and also most distinguished achievements. Most outstanding is, perhaps, his original and energetically pursued study of the strategic role played by the policy of the Federal Reserve System in sparking off the 1929 crisis, and in deepening and prolonging the depression that followed. The critics agree that this is a monumental scientific work which will long stimulate the re-examination of the course of events during this epoch.