Wednesday, August 1, 2012

Is Milton Friedman a Keynesian?

By Roger W. Garrison

There is a story about a young job candidate interviewing for an entry-level position in the geography department of a state university. One senior faculty member, whose opinion of our modern educational system was not especially high, asked the simple question, "Which way does the Mississippi River run?" In ignorance of the biases of this particular geography department and in fear of jeopardizing his employment prospects, the candidate boldly replied, "I can teach it either way."

When the question "Is Milton Friedman a Keynesian?" was first suggested to me as a topic, I couldn't help but think of the uncommitted geographer. But in this case, opposing answers can be defended with no loss of academic respectability.

When teaching at the sophomore level to students who are hearing the names "Keynes" and "Friedman" for the first time, I provide the conventional contrast that emerges naturally out of the standard account of the "Keynesian Revolution" and the "Monetarist Counterrevolution." In the context of this introductory treatment, monetarism is the antithesis of Keynesianism. To claim otherwise would come close to committing academic malpractice. Either a casual survey or a careful study of the writings of Keynes and Friedman reveals many issues on which these two theorists are poles apart.

Yet, one can make the claim that Friedman is a Keynesian and remain in good scholarly company. Both Don Patinkin (in R. Gordon 1974) and Harry Johnson (1971) see Friedman's monetary theory as an extension of the ideas commonly associated with Keynes. Some of their arguments, however, run counter to those of the Austrian School, which serve as a basis for this chapter.

And while Friedman, by his own account, was quoted out of context as saying, "We're all Keynesians now," his in-context statement is thoroughly consistent with an Austrian assessment. More than two decades ago, during an interview with a reporter from Time magazine, Friedman commented that "in one sense, we are all Keynesians now; in another, no one is a Keynesian any longer." The two senses were identified in his subsequent elaboration: "We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions" (Friedman 1968b: p. 15).

Patinkin and Johnson have each argued that Friedman's attention to the demand for money, and particularly his inclusion of the rate of interest as one of the determinants of money demand, puts him closer to Keynes than to the pre-Keynesian monetary theorists. Friedman has responded by insisting that the inclusion of the interest rate in the money-demand function is a minor feature of his theoretical framework (R. Gordon 1974: p. 159).

Austrian monetary theorists, who pay more attention to the interest rate than does Friedman and as much attention to it as did Keynes, have a different perspective on the interest-rate issue. Both Keynes and Friedman have neglected the effects of changes in the interest rate on the economy's structure of capital. From an Austrian viewpoint, this sin of omission, which derives from a common "language and apparatus," makes both Keynesianism and monetarism subject to the same Austrian critique....

Based on their high levels of aggregation, then, both Keynesianism and monetarism fail to pass through the Austrian sieve. This is the meaning of Hayek's claim that Keynes is a quantity theorist and of the corresponding claim that Friedman is a Keynesian.

Read Garrison's full analysis here.

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