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Paul Samuelson and Milton Friedman


Monetarism

In the 1950s and 1960s, monetarists, most notably Milton Friedman, began to argue that Keynesian fiscal policy had negative long-run effects. Unlike Keynesians, monetarists insisted that money is neutral, meaning that in the long run, changes in the money supply will only change the price level and have no effect on output and employment. They argued that governments should abandon any attempt to manage the level of demand in the economy through fiscal policy. On the contrary, monetarists focus on the supply and demand for money being the primary means by which economic activity is regulated. They argued that excessive expansion of the money supply is inflationary, and that monetary authorities should focus solely on maintaining price stability.

Paul Samuelson and Milton Friedman are two of America's most distinguished economists. In recognition of their achievements, Samuelson was awarded the Nobel Prize in Economics in 1970 and Friedman in 1976. Both spent most of their professional lives on the faculty of major universities (Samuelson at the Massachusetts Institute of Technology, and Friedman at the University of Chicago). Though they have much in common, they hold strikingly different views on economic issues. In particular, they differ on what role the government should play in the economy.

Classical economists had long recognized the need for government to provide goods and services that would not or could not be provided by the private sector (like national defense). But they insisted that this participation should be kept to a minimum.

Samuelson argued that too many of the problems the classical economists wanted to leave to the marketplace were not subject to its influence. These externalities, affecting things like public health, education, and environmental pollution, were not subject to the laws of supply and demand. Consequently, governments have to establish goals for the economy and use its powers to achieve them.

Milton Friedman sees things differently. Like the classical economists of old, he regards supply and demand as the most powerful and potentially beneficial economic forces. The best that government can do to help the economy, in Friedman's view, is to keep its hands off business and allow the market to ‘do its thing’. The minimum wage laws are a case in point. Whereas Samuelson advocates minimum wage laws as a means of helping workers at the bottom of the income ladder, Friedman would argue that by increasing labor costs, minimum wage laws make it too expensive for many firms to hire low-wage workers. As a result, those who

might otherwise be employed are laid off.

On the one hand, Samuelson is in favour of the concept of government-sponsored programs such as public housing and food stamps as a means of reducing poverty. Friedman, on the other hand, would prefer to give the poor additional income and allow them to use the funds to solve their problems without government interference.

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The Keynesian Revolution | Economics today

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