Milton Friedman, Ex-Keynesian

By Skousen, Mark | Freeman, July 1998 | Go to article overview
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Milton Friedman, Ex-Keynesian

Skousen, Mark, Freeman

"I had completely forgotten how thoroughly Keynesian I then was." -MILTON FRIEDMAN

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.

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