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Economics
on Trial -- THE FREEMAN July 1998
Milton
Friedman, Ex-Keynesian
by
Mark Skousen
"I
had completely forgotten how thoroughly Keynesian I then was."
--MILTON
FRIEDMAN 1
What?!
The world's most famous freemarket economist a former Keynesian?
Yes,
it's true. One of the more remarkable revelations in Milton
and Rose Friedman's new autobiography, Two Lucky People,
is Milton Friedman's flirtation with Keynesian economics in
the early 1940s. During his stint with the Treasury Department,
Friedman was asked to give testimony on ways to fight inflation
during World War II. His reply, couched in Keynesian ideology,
mentioned several options: cutting government spending, raising
taxes, and imposing price controls. Amazingly, nowhere did
he mention monetary policy or controlling the money supply,
the things Friedman is famous for today.
During
the 1930s, Friedman had also favored Keynesian-style deficit
spending as a way out of the Great Depression. His mentor
was not Keynes himself but Friedman's teachers at the University
of Chicago. Friedman recounts, "Keynes had nothing to
offer those of us who had sat at the feet of [Henry] Simons,
[Lloyd W] Mints, [Frank] Knight, and [Jacob] Viner."
2 In short, Chicago economists
were Keynesian before Keynes.
In
his autobiography, Friedman says he was "cured"
of Keynesian thinking "shortly after the end of the war,"
but doesn't elaborate. In a recent letter, he denies ever
being a thorough Keynesian. "I was never a Keynesian
in the sense of being persuaded of the virtues of government
intervention as opposed to free markets." It should also
be pointed out that Friedman's teachers at Chicago blamed
the Great Depression on "misguided government policy."
Friedman indicates he was "hostile" to the Keynesian
idea that the Depression was a market phenomenon. 3
Despite
these statements, many free-market economists have long accused
Friedman of being a quasi-Keynesian.
On
December 31, 1965, Time magazine put John Maynard Keynes
on the cover and quoted Friedman as saying, "We are all
Keynesians now." Later, Friedman said he was quoted out
of context. "In one sense, we are all Keynesians now;
in another, no one is a Keynesian any longer. We all use the
Keynesian language and apparatus, none of us any longer accepts
the initial Keynesian conclusions." 4
In
an article published in 1986, Friedman glorified Keynes as
a "brilliant scholar" and "one of the great
economists of all time." He described The General
Theory as a "great book," although he considers
his Tract on Monetary Reform as his best work. Moreover,
he declared, "I believe that Keynes's theory is the right
kind of theory in its simplicity, its concentration on a few
key magnitudes,its potential fruitfulness." 5
Many
conservatives wonder how Milton Friedman, defender of free
markets, could speak so highly of a man considered the intellectual
architect of the postwar inflation and the modern welfare
state.
Friedman
is known as the leader of the Monetarist opposition to the
Keynesian revolution. According to Friedman, monetary policy
(manipulation of the money supply and interest rates) influences
economic activity far more than fiscal policy (taxes and government
spending). Yet it must be remembered that monetary and fiscal
policies are both forms of state intervention in the economy.
Accordingly, some free-market advocates see Keynes and Friedman
as partners in crime.
Granted,
Friedman, as opposed to the Keynesians, favors a strict limit
on monetary growth. Yet even Friedman occasionally succumbs
to interventionist fever. Late last year he endorsed this
remedy for Japan's sluggish economy: print more money. Apparently
Friedman felt that the easy-money policy in effect in Japan
since 1994 (recent M1 was growing at 9.9 percent, M2 at 4.3
percent) was insufficient. "The surest road to a healthy
economic recovery," he wrote, "is to increase the
rate of monetary growth." What about tax relief, deregulation,
and open markets? Friedman failed to list any of these options.
6
Undoubtedly
he favors these remedies, but the article rekindled the old
accusation that "only money matters" to Friedman.
Friedman
the Anti-Keynesian
I
have to admit that, like many free-market economists, I am
surprised by these findings and the favorable comments Friedman
has made about Keynes. I've always viewed the leader of the
Chicago school as strongly anti-Keynesian. His Monetary
History of the United States clearly contradicts Keynes's
contention that the capitalist system is inherently unstable.
7 The book shows that the
Fed's inept policies, not free enterprise, caused the Great
Depression. Friedman's permanent-income hypothesis modifies
Keynes's consumption function and undermines the case for
progressive taxation. His natural-rate-of-unemployment doctrine
denies any long-run trade-off between inflation and unemployment
(the Phillips curve). In Capitalism and Freedom, Friedman
challenges the effectiveness of the Keynesian multiplier and
declares that the federal budget is the "most unstable
component of national income in the postwar period."
8 And, as early as 1963, he
labeled as "erroneous" the Keynesian proposition
that the free-market economy can be stuck indefinitely at
less than full employment. 9
So
where does that leave us? In one of the more controversial
contributions to my edited volume Dissent on Keynes,
Roger Garrison of Auburn University asks, "Is Milton
Friedman a Keynesian?" Garrison contends he can argue
it either way. Indeed. Yet, in the final verdict, I can't
help but think that Friedman, as an open-minded scholar, is
willing to investigate and test all theories, no matter their
source, and this methodology has gradually led him to discard
most of Keynesianism. As he himself has written, "I have
been led to reject it... because I believe that it has been
contradicted by experience," 10
1.
Milton and Rose Friedman, Two Lucky People (Chicago:
University of Chicago Press, 1998), p. 113.
2.
Milton Friedman, "Comments on the Critics," in Robert
J. Gordon, ed., Milton Friedman's Monetary Framework (Chicago:
University of Chicago Press, 1974), p. 163.
3.
"Comments on Critics," pp. 48-49.
4.
Milton Friedman, "Why Economists Disagree," Dollars
and Deficits (New York: Prentice-Hall, 1968), p. 15.
5.
Milton Friedman, "Keynes's Political Legacy," in
John Burton, ed., Keynes's General Theory: Fifty Years
On (London: Institute of Economic Affairs, 1986), pp.
47-48, 52.
6.
Milton Friedman, "Rx for Japan: Back to the Future,"
Wall Street Journal, p. A22, December 17, 1997.
7.
With Anna J. Schwartz (Princeton, N.J.: Princeton University
Press, 1963).
8.
Milton Friedman, Capitalism and Freedom (Chicago: University
of Chicago Press, 1962), p. 76.
9.
Milton Friedman and David Meiselman, "The Relative Stability
of Monetary Velocity and the Investment Multiplier in the
United States, 1897-1958," in E. Cary Brown, et al.,
ed., Stabilization Policies (New York: Prentice-Hall,
1963), p. 167. See also Friedman's recently published article,
"John Maynard Keynes," Economic Quarterly,
Federal Reserve Bank of Richmond, 83/2, Spring, 1997.
10.
"Keynes's Political Legacy," p 48
Reprinted
with permission
Economics
on Trial
The Freeman
Foundation for Economic Education
30 South Broadway
Irving-on-Hudson, NY 10533
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