The first time I had heard of Milton Friedman was when I was fourteen. I was attending a small boarding school in Aurora, Illinois, when my politically active friend Alex invited me to like a page on Facebook called "Milton Friedman, Free to Choose." Back then, I did not really understand the meaning of freedom or choice. I did understand their denotations, but when had I ever made an important choice on my own? I was always following the path that my parents had set for me.
After I graduated from high school, I was determined to make my own decisions on life. As a teenager with good intentions yet little knowledge, I borrowed Friedman's "Free to Choose" as one of the slogans for my life, though I had never actually read any of his works. For the next six years, I devoted my time to mapping out my preferences through Cartesian doubt. I tried everything and every activity I could come across, no matter what others thought of them. Through this journey, I became a DJ/Music Director for Heartland LLC, a student founded Event Planning Company, and co-founded a tutoring startup. Finding out that I could actually enjoy doing a variety of different things, I was left with a perplexing question: "How does one make a decision?" My search for an answer led me to the "Econ of Organizations" course.
Milton Friedman was a Nobel Laureate in economics. His works showed that changes in the money supply impacts income and prices, challenging the traditional view of Keynesian economics. He rejected the view that there is a stable negative relationship between inflation and unemployment rates. He argued that this relationship arises from the shock of inflation and a lag that occurs before the price levels and wages adjust to the money supply. In the long run, people would be able to anticipate the changes. He then concludes that there is a natural-rate of unemployment, one that is independent of inflation.
His Nobel Prize winning work, without a doubt, had a huge impact on macroeconomics. The terms that he coined in his works were frequently brought up in my econ classes from freshman and sophomore year. However, my interest in individual decision making was better addressed in one of his earlier papers, "The Utility Analysis of Choices Involving Risk." In the paper, Friedman hypothesizes that a consumer unit, given a set of alternatives to choose from, will behave as if:
1. It had a consistent set of preferences
2. These preferences could be completely described by attaching a numerical value-to
be designated "utility"
3. The consumer unit chose among alternatives
not involving risk that one which has the
largest utility;
4. It chose among alternatives involving risk
that one for which the expected utility (as
contrasted with the utility of the expected
income) is largest;
(points 5 and 6 provide constraints for the function describing utility of money for consumer units)
Assuming that I had a consistent set of preferences, how would I attach a numerical value designated to utility? Even if I couldn't get a precise number, could I know with certainty which choice would give me the greater expected utility? Earlier in the blog, I mentioned that I DJ and work with my friend for a startup. I know that I love music. Even listening to music gives me a lot of utility, let alone DJ'ing/producing. On the other hand, continuing to work for my friend's startup, assuming that it will continue to do as well as it is doing now, will certainly get me a decent living wage. Music involves a lot of risks. There is no guaranteed wage, and it is difficult to quantify "good music". As for the startup, there just isn't enough long-term data to show that it might continue thriving. Both have risks, but the startup seems to have a greater expected utility when averaging all possible outcomes. On top of all this, how do I know that I have enough information to accurately attach a numerical utility to my choices, or that I am interpreting the information correctly? My current answer to this is experience. The more I try to make calculated decisions on choices with risks, the more information I will gain about how I make decisions, reducing the risk that comes with the subjectivity of being my own decision maker. Furthermore, I hope to gain a new insight into decision making through this course.
Sources:
Milton Friedman profile:
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1976/press.html
Friedman's Nobel Prize lecture:
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1976/friedman-lecture.pdf
The Utility Analysis of Choices Involving Risk: http://www.jstor.org.proxy2.library.illinois.edu/stable/pdf/1826045.pdf
Friedman did contribute quite broadly to economics analysis, though he is most associated with the school known as Monetarism. But if you want to read somebody who is not so taken with Friedman, read the Nobel Lecture by Herbert Simon that we've been reviewing in class. He really gets on Friedman about modeling - for organizations Friedman assumes away the interesting issues. Getting back to Monetarism, Ben Bernanke as Chairman of the Fed basically pursued an agenda right from Friedman's playbook. What was called "quantitative easing" is exactly what Friedman would have prescribed. So Friedman's influence is still felt today, though we won't see his work directly in our class.
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