Milton Friedman (1912–2006) was an American economist, statistician, and public intellectual, and the intellectual leader of the Monetarist school of thought. His work, particularly his 1963 book A Monetary History of the United States (co-authored with Anna Schwartz), mounted the most effective critique of Keynesianism (Article 234), arguing that excessive government intervention and fiscal policy instability were the causes, not the solutions, to economic instability. Friedman established that the money supply is the primary determinant of inflation and short-run economic activity, advocating for limited government and stable monetary rules.

By the 1970s, many Western economies experienced stagflation—a harmful combination of high inflation (which Keynesian models struggled to explain) and high unemployment (economic stagnation). Monetarists argued that Keynesian policies were to blame: expansionary fiscal policy had simply led to excessive money creation, causing inflation without achieving permanent reductions in unemployment.

Friedman and his followers placed the money supply (the total amount of money in circulation) at the center of macroeconomic analysis, reviving the historical Quantity Theory of Money.

• The Core Thesis: Inflation is always and everywhere a monetary phenomenon. Friedman argued that sustained increases in prices (inflation) occur only when the money supply grows persistently faster than the economy’s output (goods and services). Too much money chasing too few goods inevitably drives up prices.

• The Policy Prescription: To control inflation, central banks must manage and stabilize the rate of growth of the money supply, not fine-tune the economy with short-term government spending.

Friedrates strongly criticized the Keynesian reliance on discretionary fiscal policy (government changing spending and taxes to "manage" demand):

• The Long and Variable Lag: Friedman argued that the time it takes for fiscal or monetary policy to affect the economy is long and highly variable (unpredictable). By the time discretionary policy takes effect, the economic condition it was meant to fix might have already changed, meaning the policy often ends up being destabilizing rather than stabilizing.

• Crowding Out: He also argued that government deficit spending (borrowing) can "crowd out" private investment by raising interest rates, thus neutralizing the stimulus effect and leading to no net gain in output.

Instead of discretionary management, Friedman advocated for strict, transparent rules for the central bank (the Federal Reserve in the U.S.).

• The Rule: He proposed a Monetary Rule where the central bank should increase the money supply at a fixed, constant annual rate (e.g., 3-5%), roughly matching the long-run growth of the real economy. This predictable, non-discretionary policy would stabilize expectations and eliminate inflation.

• The Non-Accelerating Inflation Rate of Unemployment ($\text{NAIRU}$): Friedman also argued that there is a Natural Rate of Unemployment (now often called the $\text{NAIRU}$) determined by structural and frictional factors, which governments cannot permanently push below without causing ever-accelerating inflation.

Monetarism’s influence soared during the late 1970s and 1980s, providing the intellectual backing for policies pursued by leaders like U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher, who focused on controlling inflation and limiting the size of government. While pure Monetarism later ceded some ground to a more nuanced approach, the consensus among modern central banks (such as the focus on controlling inflation through interest rates) fundamentally owes its structure to Friedman's powerful emphasis on the primacy of monetary policy.

In Conclusion: Milton Friedman and Monetarism fundamentally critiqued Keynesianism, arguing that inflation is purely a monetary phenomenon caused by excessive growth in the money supply. He advocated for a non-discretionary Monetary Rule to stabilize the economy, arguing that government intervention is often destabilizing due to policy lags and the inability to permanently reduce structural unemployment. His emphasis on limited government and controlling the money supply reshaped global macroeconomic policy.