Presentation Speech by Professor Erik Lundberg of the Royal Academy of Sciences

Translation from the Swedish text

Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,

To a considerable extent, economists are concerned with questions of economic policy; how and why governments, in their efforts to solve crises, constantly create new complications inside and between countries. For the analysis and interpretation of all the different lines of development, demands are made on the methodology and model construction of the economist. Unfortunately the social sciences – despite high ambitions – can never reach the hoped for exactitude. The enormous capabilities of people and governments to create new complications, new contradictions and conflicts, are inexhaustible and go far above and beyond the economists’ powers to bring order into the system.

This year’s prize-winner in Economics is Milton Friedman. His research is in fact aimed precisely at bringing about clarity and system in our economic thoughts in a whole range of areas, which, apart from economic policy, includes economic history, economic theory and methodological questions.

Perhaps Friedman’s most characteristic feature is his unique propensity and ability to effectively influence and disturb current notions and previously established knowledge. One can claim that without Friedman’s provocative contribution in a series of areas, the development of economic research would have been different, or, possibly only later taken its present course. Friedman’s ability to influence the course of research and debate on economic policy reminds one to some extent of Keynes. Against a background of effective, often powerfully simplified, criticism of current doctrines, Friedman has presented a different point of view, an alternative theory, most often with the support of empirical analysis.

Friedman’s name is primarily associated with the renaissance of the idea of the importance of money in the explanation of inflation and the concomitant revived understanding of, and belief in, the possibilities of monetary policy. Through him we have acquired the slogan “money matters” or even “only money matters” in connection with the appearance of monetarism as a Chicago School. This marked emphasis on the role of money should be seen in the light of how economists – often successors to Keynes – over a long period of time almost totally neglected money and monetary policy in the analysis of the course of business cycles and inflation. From the beginning of the 1950s Friedman has pioneered a justified reaction against the earlier post- Keynesian bias. The intensive debate around Friedman’s theories and theses also brought about a reconsideration of the monetary policies of the central banks – primarily in the U.S.A. and West Germany. It is rare indeed that an economist has gained such direct and indirect influence as Friedman has, not only on the course of scientific research, but also on actual policies.

Friedman’s studies on lags in all types of economic policies should be recognized as one of his most fruitful contributions. It is Friedman who coined the expressions observation-, decision- and effect-lags as terms for previously rather neglected but fundamental difficulties in obtaining a correct timing for stabilization policies during the course of business cycles. Friedman has shown how the long and varying lags pertaining to changes in the supply of money, can work in a destabilizing way. His intensively discussed economic-political conclusions drawn from these observations are that monetary policy should be simplified and be less ambitious implying the goal of keeping a stable longterm rate of development for money supply. During recent years this point of view has been accepted, to some extent, by some leading central banks.

Friedman has left his mark on yet another area of the scientific debate on the causes of inflation. This concerns the course of diffusion of wage and price rises. Friedman was the first to show that the prevalent assumption of a simple “trade-off” between unemployment and the rate of inflation only held temporarily as a transient phenomenon; in the long run (more than five years) there is no such “trade-off”. According to Friedman’s theory, a level of unemployment which is held below a structural equilibrium level leads to a cumulative rate of price and wage increase, primarily because of the destabilizing role that expectations play. Presentday formulations of wage and price determination are, in important respects, built on Friedman’s hypotheses about the importance of inflationary expectations.

A large part of Friedman’s conclusions about the possibilities of economic policy is based on his liberal belief in the positive, built-in properties of a functioning market economy. Out of this derives his negative view of the ability of governmental authorities to intervene in market mechanisms, through financial and regulatory policies to reach full employment or prevent too large imports. But it is not only a question of philosophical and liberal-political belief. On several points Friedman has made stringent analyses of how a competitive market system works. At the beginning of the 1950s Friedman was the pioneer among proposers of a new order for the international currency system based on free exchange rates. He studied the problem theoretically but also looked for empirical evidence in order to judge how such a system would function. As a matter of fact, Friedman was one of the first to perceive – and to explain – why the Bretton Woods system, with relatively fixed exchange rates, must sooner or later break down.

From a purely scientific viewpoint, one of Friedman’s most important contributions is his reshaping of consumption theory with the help of the hypotheses about “the permanent income”, in place of current annual income, as a decisive factor in determining total consumption expenditure. Here an extremely fruitful distinction is made between households’ temporary income and more permanent income; Friedman shows that a substantially larger part of the former income is saved than of the latter. Friedman has carefully tested this theory on comprehensive statistical material and gained interesting results. Friedman’s version of the consumption function has had a lasting effect both on theory and on empirical research.

The large work “A Monetary History of the United States 1867-1960” should be seen as one of Friedman’s most solid and at the same time pioneering contributions. Here Friedman has collaborated with an economic historian. The detailed analysis of the comprehensive historical-statistical material to a large extent bears Friedman’s stamp. It is seldom that one experiences, as one does in this work, such a fine combination of a detailed historical account over the whole range of developmental phases, institutional changes, the multitude of personal contributions made by leading politicians and bankers, critical evaluation of the source material as well as a perspicacious and balanced economic analysis of the complicated material in question. Perhaps one notices especially his imaginative and energetically accomplished investigation of the strategic role played by the policy of the Federal Reserve System in setting off the 1929 crisis and in deepening and prolonging the following depression.

Professor Milton Friedman is awarded the 1976 Nobel Memorial Prize in Economics for his contribution to consumption analysis and to monetary history and theory, including his observations of the complexity of stabilization policy.

Professor Friedman,

On behalf of the Royal Academy of Sciences I ask you to receive your prize from the hands of His Majesty the King.