Milton Friedman - A Monetary and Fiscal framework for
Economic Stability
Tutorial 5 - Assignment
Introduction: Friedman discusses the inadequacies of traditional fiscal and
monetary policies in stabilising the economy. He criticises the reliance on
discretionary government intervention, which he believes often exacerbates
economic instability. Friedman proposes a rules-based approach, where the
government would establish automatic stabilisers, such as a constant monetary
growth rule and built-in tax adjustments, to reduce economic fluctuations. His
goal is to create a framework that provides stability without requiring frequent
3 and disruptive government actions.
. What, do you think, is the difference between problems around “the
allocation of resources” and “cyclical movements”? Which economists
would you associate with one and the other?
The problem with “the allocation of resources” is that it pays little attention on
the short-run fluctuations of the cyclical movement
2 Economists: Smith and Hayek
The problem with “cyclical movements” is that is pays little attention to short-
term objectives and more to economic growth
Economists: Keynes
. What three basic objectives does Friedman state are shared by most
economists?
Political freedom, economic efficiency, substantial equality of economic power
Purpose: set clear goals for economic policy + provide a stable and predictable
1 economic environment
. Which three specific propositions does Friedman find particularly
relevant? Do you agree that those three propositions follow from the
three basic objectives? What does Friedman put between to go from
the first to the second set of three?
The three propositions:
– The government must provide a monetary framework for a competitive
order since the competitive order cannot provide one for itself
– This monetary framework should operate under the “rule of law” rather
than the discretionary authority of administrators
– The community would desire to reduce inequality even further and
Economic Stability
Tutorial 5 - Assignment
Introduction: Friedman discusses the inadequacies of traditional fiscal and
monetary policies in stabilising the economy. He criticises the reliance on
discretionary government intervention, which he believes often exacerbates
economic instability. Friedman proposes a rules-based approach, where the
government would establish automatic stabilisers, such as a constant monetary
growth rule and built-in tax adjustments, to reduce economic fluctuations. His
goal is to create a framework that provides stability without requiring frequent
3 and disruptive government actions.
. What, do you think, is the difference between problems around “the
allocation of resources” and “cyclical movements”? Which economists
would you associate with one and the other?
The problem with “the allocation of resources” is that it pays little attention on
the short-run fluctuations of the cyclical movement
2 Economists: Smith and Hayek
The problem with “cyclical movements” is that is pays little attention to short-
term objectives and more to economic growth
Economists: Keynes
. What three basic objectives does Friedman state are shared by most
economists?
Political freedom, economic efficiency, substantial equality of economic power
Purpose: set clear goals for economic policy + provide a stable and predictable
1 economic environment
. Which three specific propositions does Friedman find particularly
relevant? Do you agree that those three propositions follow from the
three basic objectives? What does Friedman put between to go from
the first to the second set of three?
The three propositions:
– The government must provide a monetary framework for a competitive
order since the competitive order cannot provide one for itself
– This monetary framework should operate under the “rule of law” rather
than the discretionary authority of administrators
– The community would desire to reduce inequality even further and
