Friedman vs. Keynes: Are Milton Friedman's Theories More Accurate Than John M. Keynes'

Economics is not a precise science like physics or chemistry. There are no immutable laws where an action always results in a specific, predictable consequence. Instead, economics is a field based on hypotheses, opinion, and the selective use of data because the vast number of variables cannot be fully or adequately categorized.

It's amusing to note that a book examining the theories of Nobel Prize-winning economists often reveals that many winners have overturned the theories of their predecessors. This can create a humorous but also insightful commentary on the nature of economic theory.

The Theories of Milton Friedman and John M. Keynes

To understand the differences between Milton Friedman and John M. Keynes, it's essential to delve into their writings and theories. Friedman and Keynes' economic writings are expansive, making it difficult to make definitive subjective statements, much less objective ones, to determine which theory is more correct.

Monetarism vs. Keynesian Economics

The most obvious example of Friedman's critique is his book "A Monetary History of the United States 1867-1960," which he co-authored with Anna Schwartz. The book summarizes monetarism, Friedman's critique of Keynesian economics, and presents a contrary view of the role of monetary policy in the Great Depression. For Keynesians, the government should engage in fiscal and monetary policy to stabilize economic output. They argue that left to their own devices, markets will create inefficient economic outcomes due to the volatility of aggregate demand.

Keynesian Economics

Stabilizing economic output through fiscal and monetary policy. Aggregate demand is the driving force behind economic output, which is inherently volatile and unstable. Economic downturns require government spending to increase aggregate demand, using fiscal policy. Central banks increase the money supply, using monetary policy, to stimulate economic growth. During times of rapid expansion, the government should reduce spending, and central banks should decrease the money supply to control inflation.

Monetarism

Economic output or GDP and inflation are determined primarily by the money supply. Central banks or governments should regulate the money supply rather than engaging in discretionary monetary or fiscal policy. The growth rate of the money supply should be the target. Income across the economy, GDP, and economic growth depend on the money supply, not aggregate demand.

Which Theory Has Proven More Correct Over Time?

The truth is that neither theory has proven definitively more correct over time. Macroeconomics is a set of tools that economists use to solve economic problems, and economic cycles dictate which tools are appropriate.

In the 1970s, when inflation was rampant and economic growth was slow, monetarism using Friedman's theories was employed to reduce inflation, leading to a severe recession before economic stability was restored. In 2007/2008, when economic output was low, Keynesian prescriptions of increased government spending and increases in the money supply were used to boost growth. Currently, with inflation likely to be the primary concern, monetarism may make a comeback.

Current Debates and Learning

While it's tempting to assert that one theory is decisively better than another, the reality is more nuanced. Some economists argue that using Keynesian theories in response to the Great Recession was inadvisable, while others believe it was necessary. Macroeconomics is a complex and imperfect science, and economists are still learning and debating which theories are best under which circumstances.

When assessing Friedman versus Keynes, our focus should be not on whose theory is more correct, but on understanding their theories and assessing their merits. The choice of economic theories depends on the current economic problem and the context in which they are applied.