"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. More over, 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 modem 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 14only 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 gradu-ally 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
At the time of the original publication, Dr. Skousen
was an economist at Rollins College, Department of Economics, Winter
Park, Florida 32789, a Forbes columnist, and editor of Forecasts &
Strategies. He is also the author of Economics on Trial (Irwin, 1993),
a review of the top ten textbooks in economics. He was working on his
own textbook, Economic Logic
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 from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
July 1998, Vol.48, N0.7.
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