His famous investigation into the causes of the Great Depression summarising these views quite succinctly: “The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy” (Friedman, 1962, P. 1)įriedman took major issue with the perceived necessity of widespread government intervention in the economy. In answer to the question of how a consumer can be expected to react to an unexpected change in their financial circumstances he cites, “the answer depends on how the change affects the consumer unit’s evaluation of its longer-term income prospects, as summarized in its estimated permanent income” (Friedman, 1963, P. In a later 1963 paper titled “Windfalls, the ‘Horizon,’ and Related Concepts in the Permanent-Income Hypothesis”, Friedman offered further clarification of his views on anticipated consumer expenditure. Specifically referring to the Keynesian Consumption Function, Friedman states “The effect is almost certain to be a much smaller estimate of the marginal propensity to consume out of current income than would be obtained from a function that makes consumption dependent on current income alone” (Friedmann, 1957, P. This finding had the very practical implication of reducing the extent to which a given economy is reliant upon government expenditure as a means of managing and, or stimulating economic activity.
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