John Maynard Keynes (pictured left) versus Milton Friedman: the economics clash to end them all. It is not merely that the pair were both phenomenally intelligent, frequently caustic debaters; nor is it that they hail from such different backgrounds, one an Eton-educated Englishman, the other the Brooklyn-born son of Hungarian Jewish immigrants. The fact is that the two men stood for radically opposing doctrines. They represent the ideological battle underlying the economics of the past 50 years. Whereas Keynes paid more attention to unemployment than inflation, and warned that the economy could be improved by a certain amount of state interference, Friedman argued otherwise. In his seminal book A Monetary History of the United States 1867-1960, co-authored with Anna Schwartz, he set out the theories of monetarism. – Telegraph
Dominant Social Theme: Giant versus giant?
Free-Market Analysis: This is a very interesting recent analysis by the Telegraph because it focuses on Milton Friedman and John Maynard Keynes as the archetypical east and west of economics. It is written by Edmund Conway whose Boom and Bust article we reported on just the other day. We thought the Boom and Bust article was something of a mis-hit, skipping over the culpability of central banks for the financial crisis in favor of blasting something called "capitalism" – whatever that is these days.
In fact, any sane person can see clearly that if one conflates capitalism with free-markets, the conclusion must be that protecting free-markets have increasingly not been a great concern of Western leaders. The West is taxed too much and its institutions fix the price of money and already over-regulate even the simplest financial transactions. Western governments, and now the American government, are increasingly intertwined with the largest corporations leading to a kind of command and control economy more akin to failed Eastern financial systems.
In setting up Friedman in contrast to Keynes, Conway once again skips over the free-market part of his argument. We don't have any anything against Conway – actually his past few articles have been quite good from a mainstream press standpoint in that they tackle challenging subjects. But in producing such ambitious articles, Conway is inadvertently providing us with an example of the blind spots that mainstream media continues to harbor when it comes to economic analysis.
What Conway misses is that Milton Friedman is actually a kind of iconoclast and that the Chicago Freshwater school is a watered down version of real free-market economics – Austrian economics that got its start 200 years ago with the formulation of the theory of marginal utility (the idea that prices are endlessly fungible at the margins and only the marketplace itself can determine them at any given point).
One actually has to trace back the roots of an intellectual conversation to understand from whence it came and how it got where it was. If one does not perform this exercise one ends up with the kind of article that Conway has written. It presents Keynes, who partakes of a 5,000 year old tradition of socialism and dystopianism and contrasts his perspective with Friedman's whose professional life, admirable as it was, seems to have been spent presenting a watered down free-market apologia.
The real giant of the 20th century when it comes to free markets was undoubtedly Ludwig von Mises who helped elaborate on central bank generated business cycles. Friedman knew of this work of course but he chose not to promote it. Instead, he spent the latter portion of his professional life first blaming central banks for economic malfunctions and then proposing how to use the same flawed tools to rectify the difficulties. Contrast this approach with Austrian frankness which defines the problem in ways that are similar to Friedman but then with appropriate rigor concludes that the institution of central banking is hopelessly flawed because it is a kind of price fixing – and price fixing inevitably distorts and eventually ruins any economy it touches.
Here's some more from Conway on both Keynes and Friedman:
The fact is that the two men stood for radically opposing doctrines. They represent the ideological battle underlying the economics of the past 50 years. Whereas Keynes paid more attention to unemployment than inflation, and warned that the economy could be improved by a certain amount of state interference, Friedman argued otherwise. In his seminal book A Monetary History of the United States 1867-1960, co-authored with Anna Schwartz, he set out the theories of monetarism. "Inflation is always and everywhere a monetary phenomenon," Friedman said. In short, by pumping extra money into the system (as the Keynesians were prone to doing) governments would drive up inflation, risking major economic pain. Friedman believed that if central banks were charged with maintaining control of prices, most other aspects of the economy – unemployment, economic growth, productivity – would take care of themselves.
In reading this summary, we seem to detect a certain fuzziness as to the world "inflation." Friedman certainly understood that inflation was defined as an expansion in the supply of money (or money stuff in the case of paper bills). When Conway writes "By pumping extra money in the system, governments would drive up inflation" he seems to be using the word inflation two ways. What he may mean in the second instance is "price inflation" because the act of "pumping money" into the economy is the actual act of inflation from a classical perspective.
We also have trouble with the conclusion that Keynesian economics demanded state interference while Friedman's central banking approach did not. True, Friedman advocated a "steady state" central banking approach to the economy, but central banking itself is a monopoly manipulation of currency, no matter whether the price fixing takes place in public or private hands. Friedman's free-market sympathies seem to fail him when it comes to this most important Western institution.
Give Conway credit. This is a good mainstream article in that it courageously takes on important economic points not often discussed and attempts to contrast two very important philosophies. But in leaving out the development and stance of the real free market philosophy that developed over the past 200 years in order to emphasize Friedman, the article ends up contrasting economic thinkers who certainly had more in common than would seem at first glance. And unlike Friedman, Mises did not believe central banking was salvageable. As do other free-market thinkers, he looked to the invisible hand of nature to manage money as much as possible. (His advocacy of a gold standard is grist for another day.)
It is a little strange from our perspective to see Milton Friedman constantly being identified as a proponent of free markets. When it came to modern markets' fundamental building block, he proved to be a proponent of bank-managed money. The Austrians have long recognized the futility of trying to manage money by setting interest rates and other statist money nostrums. Austrians of various colors wish for the return of true free market money, gold and silver, within the context of a free-market money standard. And truly, these days, there is little excuse not to notice the Austrians. Google Ludwig von Mises and you will find nearly as many mentions if not more than John Maynard Keynes – thanks to the Internet, truth is spreading.