How did Friedman differ from Keynes?

by on December 1, 2006 at 7:39 am in Economics | Permalink

Brad DeLong and Greg Mankiw offer insightful comments on Friedman and Keynes.  On macroeconomics, what does the difference boil down to?  I can think of a few possibilities:

1. Keynes thought a horizontal LM curve ("the liquidity trap") was possible, but Friedman did not.  This was Friedman’s own view, at least as expressed in Milton Friedman’s Monetary Framework.  Without a horizontal LM curve, monetary policy can always pull the economy out of a downturn.

2. Keynes emphasized volatile flows, Friedman emphasized stocks of wealth; a stocks view should imply greater macro stability.

3. Keynes challenged the assumption of gross substitutability, and therefore thought that price and wage flexibility could lead to a downward spiral of falling prices and incomes.  Wage and price stickiness was not so much an assumption for him as a policy recommendation.  Friedman viewed stickiness as a necessary evil, stemming from the general imperfection of the world.

4. Friedman thought that the liquidity premium on money was unlikely to keep interest "too high"; for Friedman the interest rate is determined solely in the loanable funds market by time preference and productivity, a’la Irving Fisher.

5. For Keynes the demand for investment was inherently unstable, for "beauty contest" reasons.  Friedman viewed expectations as "adaptive," and tracking the world with a lag, rather than tracking the expectations of other people.

6. Friedman simply had more faith in the self-adjusting nature of the market, and #1-#5, and other possibilities, were mere epiphenomena of this broader philosophical difference.

1 G.Visakh Varma December 1, 2006 at 11:04 am

Yes there are lot of differences between Keynes
and Friedman, both theoretically and ideologic
ally…Infact, polar differences.

2 Ronald Brak December 1, 2006 at 4:02 pm

I think Keynes had more fun.

3 Bill Conerly December 2, 2006 at 7:16 pm

I ate up Friedman as a young man, but on point number 5, the instability of capital spending, I think Keynes accurately described what occassionally happens. The tech boom of the 1990s–no executive really knew if building out an Internet infrastructure made sense. In Knight’s terms, it was uncertainty, not risk. So they did what everyone else was doing. I don’t think Keynes’s approach makes sense for everyday forecasting, but sometimes it does have the ring of truth.

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