Challenges of Milton Friedman’s Contributions: A Perspective of Behavioral Economics

Abstract

This paper reviewed Milton Friedman's major contributions and critiqued his theories from a perspective of behavioral economics. Overall, behavioral economics can be a significant supplement to the traditional Friedman's theories to better predict economic events. More specifically, in terms of money supply, behavioral economics found that emotions can distort the assumption of the quantity theory of money and it may also affect economic output through its big role in decision making. As for the permanent income hypothesis, it can better explain the effect of income on consumption from the psychological aspect such as low confidence. His major point of a free market for economic and political freedom can be challenged by Nudge concept from behavioral economics. The government can help people to achieve their goals without damaging their autonomy. In addition, behavioral economics explores more and better reasons for the common phenomena of irrational behaviors against the traditional assumption that people are always rational.