Friedman never met my wife, evidently. But thanks for the explication!

You are referring to Friedman's permanent income hypothesis. The idea here is that income can be broken down into two components, transitory--like say winning a lottery, and permanent which is like a monthly paycheck. It is the latter, according to Friedman, that determines one's consumption spending. That is, if you lucked out and won $1,000 in a lottery you'd save it (or pay down debt) so that you'd have more permanent income in the form of interest (or lower debt service which works out to more spending money as well per period--e.g. per month).

The problem is that paychecks and permanent income in general are not constants and don't even grow at constant rates. For example, a college student might have a monthly paycheck of $1,000, but after graduation that could jump suddenly to 2 or even 3 times that amount. So measuring this hypothesis is difficult. Still it has quite a bit of allure for many economists since it makes so much sense and is fairly elegant.

I saw in Friedman's obits that he argued we spend according to our lifetime expectation, not according to how much $$$ we have in our paycheck at a given time. Which I presume means that, if I anticipate never being well-off, I'm likely to spend less and save more?

Is that a correct understanding of Friedman's position? And if so, why on earth would that be correct?

Milton Friedman, the Nobel Prize-winning economist who advocated an unfettered free market and had t...