Fang 1 Andrew Fang December 21st, 2011 Economic Essay

Essay on Power and Ideas

Over the past two centuries there have been many great economists who have contributed to the science we now call Economics. The two great economists who have contributed vastly to the American Tradition are Milton Friedman and John Maynard Keynes. Many of the Economists of the United States Government are Keynesian Economists. Frazer starts off his book by mentioning the important role the Jewish people have played in the world. He gives a brief historical synopsis of Jews. He mentions that Napoleon Bonaparte knew the importance of Jews and fought for their rights. Frazer also mentions how Wall Street was also founded by Jewish Immigrants. Frazer then proceeds to talk about Milton Friedman, who as I have stated, is one of the two great economists. In 1912, Brooklyn, New York, Milton Friedman was born. His parents were not great intellectuals, but average workers. The family lived apart from the other Jews and because of this, Milton Friedman gave up religion at an early age, but residues of his Jewish culture lingered on him. Friedman was extraordinary in the fact that he could express really complex concepts using simple language. Friedmans professional and public image. Friedman tried to resolve the conflicts caused by differences in ethics by creating a super ordinate goal, freedom. One might ask himself why freedom? Well freedom is one very important component of the phenomenon dubbed the invisible hand. Adam Smith was the first to formulate this concept that an economy This had an enormous impact on

when in recession it will autocorrect itself. This can also be seen as the Short Run Aggregate Supply curve shifting in accordance to the shift of the Aggregate Demand curve. Fang 2 The British Tradition started in Scotland in the late half of the eighteenth century. An important event in this time period was the publication of Adam

Smiths The Wealth of Nations, published in 1776. Economics true origin is the superpower of that time period, Great Britain. Many great figureheads of the British Tradition are Adam Smith, John Maynard Keynes and Alfred Marshall. Will Frazer also states that these economists were revolutionary because they counteracted crises that occurred at that time with their own theories. The crisis for Adam Smith was restrictions on enterprise. Adam Smith resolved this by promoting laissezfaire in economic activities. This was in essence the invisible hand phenomenon. The Crisis for John Maynard Keynes was massive unemployment and the near collapse of capitalism. His theory for this was increased public spending and increase in budget deficit. My personal opinion is look where that got us now. Were in debt and our currency is appreciating. Furthermore we also have a trade deficit. Everywhere we look we see made in China, but abroad where can we see made in USA? The crisis for Alfred Marshall was povertys existence in an era of increasing living standards. He counteracted this by increasing the quantity and quality of education, and also a generous amount of philanthropy. The Keynesians took two routes toward acquiring economic stability. The two routes were by using fiscal policies and monetary policies. John Maynard Keynes put emphasis on capital spending. He was the first to try to use these two

to stabilize the economy ever since Ricardo separated the two. He also showed special interest in open market operations. He believed that the Federal Reserve held power to control interest rates. Though this is the type of economic view many have adopted in recent times, John Maynard Keyness Fang 3 economic perspective only saw the surface of the lake. He did not consider the long term effects that accompanied the short run gains. In short he would win the battle and lose the war instead of vice versa. Friedman graduated from Rahway High school at age 15. He was a diligent student and because of this his credentials (aka passing and failing grades) were not questioned by professors and colleagues. When he graduated he was drafted into the ROTC, the reserve officers training corps. This was not ideal for him for a few reasons: his small stature as an adult, he was only five foot three as an adult, and his background of being an Eastern European Jew caused him to have an aversion to military services. He was drafted into the R.O.T.C. because when he went to Rutger University, it was still a private school and required two years of service. When he was there, he was really interested in mathematics and wanted to be an actuary, this is a business professional who deals with financial

uncertainties. But he changed his educational path upon meeting Homer Jones, an economic teacher at Rutgers, and Arthur Burns, who at that time was an assistant professor. Burns was also of Jewish descent. His family had immigrated from Stanislaw, Austria to New York. Arthur Burns graduated from Columbia University and received his Ph.D. there. Arthur Burns also served as the chairman on the Council of Economic Advisors during President Eisenhowers term. Fang 4 Arthur Burns and Milton Friedman were wonderful friends, but these two had different approaches to resolving matters. Frazer states that Burns exuded

astuteness and worked from inside, on the other hand Milton Friedman

influenced through overpowering and persistent argument.

Milton Friedman

worked through the press and influencing future high officials of the government. Friedman also wrote a paper called A Theory of the Consumption Function, which helped slightly correct the inaccuracy that John Maynard Keyness paper, General

Theory had supported.

Keynes supported the theory that unemployment was

more dependant on the demand for output rather than prices. Milton Friedman

rerouted this theory and corrected it so that unemployment is dependant on the permanent income of households. Milton Friedman received the Nobel Prize award for economics, in 1976, because of his correcting the consumption function and his research on monetary history of the United States of America. Milton Friedman was also one of the first principle members of the statistical research group (SRG). The Statistical research group existed during the years 1942-1945. Their office was located at the Scientific Research and Development at Columbia University. Their purpose was to research math and science for war, but they also extended the research of theoretical math into practical uses. They helped Friedman with his education in math and statistics. In this book, Wallis is quoted [The group] was composed of what surely must be the most extraordinary group of statisticians ever organized, taking into account both number and Fang 5 quality. There were 18 principal members. The majors of the members were a melting pot. Mr. Frazer states that Milton Friedman had two aspects to his economic approach: separation of the monetary and fiscal portions of the government, and deviation from the Keynesian view of interest rates as instruments of the government. Arthur Burns was quoted before his rise to Feds Chairman The responsibility of the Fed is to supervise monetary policy. I dont think its the chairmans job to lecture the other branches of government on taxation and

spending policies. In this aspect, Arthur Burns advocated Milton Friedmans point of view, but Arthur Burns acted in the opposite direction of his words and was thus replaced by William Miller, in 1965. Changes were brought to the Federal Reserve during this time period. One of the major changes was enacted by Congress passing the House Concurrent Resolution 133, which was later written into the Federal Reserve Act, in 1975. This act required the Federal Reserve to announce its plans for a given year in advance. In the 1970s, a new strategy emerged, it was concentrating on short run changes by changing the money market interest rates. This all occurred during Arthur Burns chairmanship. After Jimmy Carter came into office and changed personnel, there was a temporary reduction in unemployment, a reassertion of double digit inflation, and ultimately inflation, recession, and declining productivity. The 1960s were the start of the Keynesian era. John F. Kennedy needed to identify unsatisfactory things in the society and promise an improvement Fang 6 persuasively; this helped jumpstart the beginning of the Keynesian era. For a short while afterwards, the economy in the United States of America was stable. The unemployment rate went down and economic growth went up. But shortly afterwards, in 1969-1970, stagflation occurred. Stagflation is defined as the shift

to the left of the Short Run Aggregate Supply Curve in the Aggregate Supply and Aggregate Demand graph. This causes the simultaneous inflation and increasing unemployment. As discussed, Burns and Friedman were both revolutionary economists of their time, but they acted drastically differently than each other. Burns was an active player in the jungle of economics, while Friedman influenced others and was almost never involved directly with the government. Friedman also firmly believed that political freedom and economic freedom were deeply intertwined, thus when he went to Chile briefly for a lecture , he was surprised by their ability to make of themselves an exception from his postulate. He also tried to influence the people from Chile by establishing an exchange program. But Milton Friedman also gave a speech on March 1975. It was a prescription to Chiles economic problems. It prescribed currency reform, cuts in government spending and laissez-faire, so that unemployment will go down, the Aggregate Demand curve will shift right and economic growth will also go up. During this same time period, Chile had just recently gone through a coup dtat, so the Junta, the dominant power, tried to establish their platform of control by banning political parties and labor unions, and even more atrocious was the suspension of the constitutional guarantees and rights.

Fang 7 Through all of Mr. Friedmans hard work, he achieved one of the highest recognitions ever in economic science. The 1976 Nobel Memorial Prize in

Economic science. For the world it was such great news that Friedman received the news by media before the telegram got to him. In economic history, the nineteen twenties and nineteen thirties were both periods of change. It marked the end of the Keynesian era, the beginning of progress for both the United States and the United Kingdom, but was anteceded by a period of inflation and recession. It was also characterized by a return to preWorld War One concepts. few of these concepts were a return to a more stable

medium of exchange, more emphasis on international trade, competition and individualism. The return to the use of gold, however, would be very hard for the United Kingdom because by the end of World War One, Great Britain had lost much of her wealth and had been crippled by abominable World War. In addition to the insufficiency of wealth to back up the currency, John Maynard Keynes argued that the constant, unwavering value of the currency only shackled and restrained the country. The pound in this time period was way overpriced in relation to the status of the economy and in relation to the United States booming economy. Keynes stated that the return to the gold standard was

abandoning the attempt to moderate the disastrous influence of the credit- cycle
on the stability of prices and employment. John Maynard Keynes became

interested in the open market operations that originated in the United States Federal Reserve. He described this phenomenon, by which the government of Fang 8 the United States creates credit, as such, A regulated non-metallic standard has slipped in unnoticed. It exists. Whilst the economist dozed, the academic dream of a hundred years has crept into the real world by means of the bad fairies-the wicked Ministers of Finance. Keyness Approach had two characteristics: he was interested in the interest rate as the explanatory variable, and he had nave faith in the intellectuals that served the government and their ability to do the right thing. As I have seen in class and in theory, it would be better to do nothing because legislative actions are delayed and just make matters worse, but one can not expect politicians to announce that to counteract a recession theyll do nothing. Marx and Engels works were based on the fact that society had not progressed the way it should have according to John Locke. The dissonance between capitol and labor was very alarming. This helped progress Economics from a philosophical science to a physical science. Herman Heinrich Gossen was one of the first to embrace this new concept. He and a few others started the trend

that made the definition of economics: a study of principles governing the allocation of scarce means among competing ends. I read this as the study of how to manage scarce resources and the paradox between quality and quantity. There has always been the problem of equity and distribution of income. Some governments have tried to resolve this problem by intervening through taxation and transfer payments. Drawing on David Ricardos work, Karl Marx came up with his labor theory of value. To make this theory work, Marx needed to ignore the individual advantages each worker might have and treat the labor Fang 9 force as a homogenous group of people. But Karl Marx was not oblivious to this; in fact he was aware that labor was unequal. He stated that One man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time. But for his theory to work, he needed to eliminate such obstacles and view the labor force as simple homogenous units. One very important underlying idea of the redistribution efforts of the government was the fact: when given extra income, a lower income household will use more of it than a household with higher income. Interestingly enough Milton Friedman also agrees that government actions actually cause more problems than they solve. Friedman: Because I think the government solution to a problem is usually as bad as the problem and very often

makes the problem worse.

My opinion on this is that the government is

metaphorically playing a horrible chess game. To win at a chess game, both literally and metaphorically, you must never only consider short term successes and losses. You must look at the broader picture. No one wants a massive, destructive domino effect. Two good example of the governments failure to do this are the minimum wage law, which Milton Friedman mentioned in an interview, and the unemployment benefits. The minimum wage law is a poisonlaced piece of cake. On the outside people consider it a blessing, but in reality its making the lower class suffer. This is because the law has made it such that the price of inputs, workers, has gone up so the demand will go down for them, thus creating unemployment. The unemployment benefits are working similarly in the fact that the unemployed now dont have much of an Fang 10 incentive to go back to work, since they are still receiving income. During the 1980s the federal reserves actions were very volatile and Milton Friedman gave a warning that they should perform less volatile policies. They did not listen for a while because the financial markets did not reflect any indication that Friedman was right. But later the banks started to use new types of assets. They revised their definition of money stock M1 and they also started

implementing lagged reserve requirements. The lagged reserve requirements used the deposits held two weeks in advance to decide the reserve requirements. There were many critics for the lagged reserve requirements. Milton Friedman was one of the first to give his reasons why this was a bad idea. In Newsweek and the Wall street Journal, Milton Friedman stated that the LRR practice caused some instability in the narrowly defined money aggregate. Thus because of this, the Board decided in June 1982 to adopt contemporaneous reserve requirements.