Where is the economy going? A pact with the devil – Economy for the common good | SITE_NAME

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Milton Friedman, economist and Nobel Prize winner in Economics in 1976, considered one of the leading figures of liberalism, focuses his economic doctrine on the explanatory process of expectations in macroeconomic imbalances through nominal rigidity and inelasticity of price expectations. Later, he modifies his approach to that of adaptive expectations[1]which seeks to explain the ability of individuals to adapt their expectations based on past information, thus focusing on the neutrality of money.

Friedman’s contribution allowed us to understand that agents act rationally, depending on the information available, the latter, would allow predicting future results and thus make a “correct” decision. Namely, individuals possess certain information, which will be the indispensable means for them to make their forecasts of different economic variables —verbi gratia, inflation—in turn, adjust their expectations every time the facts change. For example, if people understand that an increase in the level of unemployment leads to an expansionary monetary and fiscal policy (when the unemployment rate is very low, restrictive policies will be chosen) they will incorporate these expectations into their forecasts.

Likewise, an increase in the level of unemployment puts job seekers and providers on the alert, about the stabilization policy that would become an inflationary process that would quickly be in the offing; then, they will establish an inflationary premium in their contracts. However, workers would simply end up making a devil’s deal by being deceived by an illusion, since inflation would rise faster than real wages, thus they would be paid less, and their long-term net profit would be reduced. would be affected. On average, the frictional unemployed will not reduce their average duration of unemployment, just as employers will not wish to hire more labour, notwithstanding the assumption that long-term contracts and commitments is a form of wage inflexibility and prices.

For the month of August 2022, the unemployment rate in Colombia was 10.6%[2], however, those workers who are looking for a job change are not considered unemployed, that is, there is a distinction between “without work” and “unemployed”. Following the above, we must ask ourselves a couple of questions, namely, what is then the optimal period to look for a job? Or what is the optimal duration of unemployment?

Taking into account the above, it is relevant to emphasize expectations about prices, this is due to its importance in economic behavior; following Friedman (1972) “the higher the expected inflation rate, the higher the real inflation rate must be to reduce unemployment” (p. 194); However, it is convenient to have a deep knowledge about the context of each economy, for example: Colombia experienced a strong crisis at the end of the 19th century, due to the accelerated emission of money by the conservative party, with the purpose of financing the War. of the thousand days, causing an inflation of up to three digits between the period from 1899 to 1902. This being the case, in order to mitigate the inflationary effects and agree on goals that would lead to economic stability, in 1923 the Kemmerer Mission began, one of the The consequences of this task was the creation of the Banco de la República as an entity independent of the other political powers.

Currently, Colombia is going through an inflationary process, whose rate for the month of September was 11.4%[3]. Now, inflation in Colombia has been affected by different factors, both national and international: In the first, the rise in the dollar and the presidential uncertainty this year, in the second, we find factors such as supply chains , which were affected by the confinements derived from the covid-19 pandemic; this led to a reduction in consumption and, in parallel, to an increase in production costs, this leads to an increase in final prices, this cost is assumed by consumers.

In conclusion, knowledge regarding the average duration of unemployment is important for economic policy designers and for analyzing the optimal development of a country’s economy; as is inflation, however, we can identify that the price level is affected by a wide range of variables, which appear at the national and international level. It is in this sense, where Friedman’s approach plays a determining role when it comes to structuring monetary policies, where we highlight the importance of the independence of the Central Bank —see the example mentioned above on the issue of money by the conservative party—, whose job is to seek price stability.

[1] Models based on adaptive expectations are ways of predicting the behavior of individuals in the face of an event, based on past experiences and expectations of that same event.

[2] According to the information for the month of August 2022, issued by the National Administrative Department of Statistics DANE, https://www.dane.gov.co/index.php/estadisticas-por-tema/mercado-laboral/empleo-y-desempleo#:~:text=Para%20el%20mes%20de%20agosto,2021%20 (61%2C3%25).

[3] According to the information for the month of September 2022, issued by the National Administrative Department of Statistics DANE, https://www.dane.gov.co/index.php/estadisticas-por-tema/precios-y-costos/indice-de-precios-al-consumidor-ipc/ipc-informacion-tecnica

Valentina Velosa Garcia, Andres Enrique Cudris Penaranda, Juan Camilo Carranza Barrios

Economics Students-University Santo Tomas

Bibliographic references

Argandoña, A. (2020). Milton Friedman and monetarism in theory and practice.

Iberian Journal of the History of Economic Thought7(1), 29–43.


Bernanke, Ben. (2015). The courage to act: memory of a crisis and its aftermath. Barcelona:

Peninsula Friedman, M. (1959). The demand for money: some theoretical and empirical results. Journal of Political Economy, 67(4), 327-351. https://doi.org/10.3917/redp.313.0213

Pierre-Manigat, M. (2020). The independence of the central bank and its role in the domination of financial capital over the State. icons. Journal of Social Sciences, (66), 213-229. https://doi.org/10.17141/icons.66.2020.3901

Velez, E., Gaviria, M., & Rengifo, P. (2008). The Importance of the Independence of Banco de la República. Bank of the Republic.

Rodrigues, S. (2022). Can the increase in the dollar generate more inflation in Colombia? Evaluate Analytics. Website:


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Where is the economy going? A pact with the devil – Economy for the common good | SITE_NAME