The Economics Book

199

situation increases incomes and
has a large, predictable effect on
consumption, restoring the
economy to full employment.
In 1957, Friedman published
A Theory of the Consumption
Function, an important work that
began to challenge the Keynesian
orthodoxy. Friedman argued that
people distinguish between
“permanent income”—their stable
long-term earnings, which they
feel confident to consume—and
“transitory income”, which is less
permanent, can be positive or
negative, and which does not affect
their consumption. Those with high
incomes will have high transitory ❯❯

See also: The Keynesian multiplier 164–65 ■ Inflation and unemployment
202–03 ■ Saving to spend 204–05 ■ Rational expectations 244–47

POST-WAR ECONOMICS

Money should grow at a modest, constant rate

in order to keep inflation low.

The demand for money

can be predicted by looking at

people’s behavior.

The supply of money

can be controlled by

the government.

Government spending

cannot reduce

unemployment below its

natural rate without

causing inflation.

Inflation damages

economic efficiency

and should be avoided.

Governments should do nothing but

control the money supply.

A man papers his wall with money

during the German hyperinflation of

1923. Friedman thought that state
      intervention to reduce unemployment
      inevitably led to high inflation.

Milton Friedman

Born in Brooklyn, New York,

in 1912, Milton Friedman

was the son of Hungarian

immigrants. He was taught by

the US’s top economists—at

Rutgers, New Jersey, for his

bachelor’s degree; Chicago for

his master’s; and Columbia,

New York, for his PhD. At

Chicago he met economics

student Rose Director.

They married in 1938, and

collaborated throughout their

careers. From 1935 to 1946, he

worked as a statistician and

economist in New York and

Washington. From 1946 to

1976, he taught at the

University of Chicago. It was

there that he became well-

known. His fame increased

with the 1980 TV series and

book Free to Choose. He was

an advisor to Presidents

Richard Nixon and Ronald

Reagan. He died in 2006.

Key works

1957 A Theory of the

Consumption Function

1963 A Monetary History of

the United States, 1867–1960

(with Anna Schwartz)

1967 The Role of Monetary

Policy Presidential

address to the American

Economic Association