Question

Economist Milton Friedman once said:

“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”

Describe the role of the Household in an economic system. In terms of the Circular Flow Diagram, what do you believe that Friedman meant by this statement? How does the participation and knowledge of the population augment the influence of the other entities in an economy? You should use a properly labeled Circular Flow Diagram to support your explanation.

Answer 1

Household plays an important role in an economic system, they provide labour, land, capital and entrepreneurial ability to firms/companies and also purchase goods and services from firms/companies and in return of househld services firms/companies pays, i.e. factor payments to them and hosuehold also deposit their savings in the financial system, i.e. banks, stock markets, insurance companies, etc. and in turn firms/companies borrowes money from these financial institutions for purchase of machinery, land, capital goods and finally to increase their production and this makes a circular flow of incone in an economy.



in terms of circular flow diagram freindman meant that unless opinion/income and expenditure habits and thought process of household/people does not affect positively the political class/elected people, the political won't do any right to them. When political class sees the household are giving their contribution in the economy in terms of labour, expenditure and paying taxes on time and without any issues and also depositing their savings in the economy and this savigs is used by the firms/companies to expand their business and purchase of new machinery, land, etc, wrong people at political class won't do any right for them.