What Milton Friedman Got Right, and Wrong, 50 Years Ago

Paradigm shifts do not come often in economics. From Adam Smith to John Maynard Keynes, there is only a handful of scholars who can claim to have radically changed the way we think about how markets should work and what governments can do to improve their functioning.

One such moment came almost 50 years ago when Milton Friedman delivered his presidential address to the American Economic Association in Washington D.C. The subject of the speech was the role that monetary policy can have in reducing unemployment and boosting growth. In Friedman’s view, central banks cannot reduce the long-run rate of unemployment at which an economy operates (the “natural rate of unemployment”). Were the monetary authorities to stimulate demand then, they would only prompt workers to demand ever higher wages and cause inflation to accelerate.