Friedman
versus Keynes
I am
not an economist, but I studied Economics at University in Boston a long time
ago. I pulled out my old textbook and find that My
Economics courses were Keynesian economics from a text book by Paul Samuelson
who was a professor at MIT across the river in Cambridge at the time. Even back then, I felt that manipulating the
economy through government spending was not right.
This is
a quick comparison between Keynesian and Friedman economics. High inflation, which we are now suffering
has nearly always been associated with Keynesian economics.
Apparently,
the people running Washington these days don’t have much more background in
economics than I had some 65 years ago.
Probably less, since they want to spend more trillions of dollars in the
middle of inflation on the way to a recession.
“Keynes
and Friedman are the most influential economists of the 20th century.
Keynes vs Friedman
John
Maynard Keynes (1883-1946) was a
British economist and is considered one of the founders of modern
macroeconomics. Keynsian economics show that in the short run, especially during
recessions, economic output is strongly influenced by total spending
in the economy. Keynes' theories were extremely influential from the Great
Depression to the oil shocks in the 1970s. Milton
Friedman (1912-2006) was an American economist
and statistician who led the famous Chicago School of economics at the
University of Chicago. Friedman challenged some of the Keynesian theories
proposing an alternative macroeconomic policy known as "monetarism"
which advices focusing on controlling monetary supply. Friedman's theories have
strongly influenced policy contributing to a change of paradigm away
from Keynesian economics. Nonetheless, the advent of the recent global
financial crisis has led to a resurgence
of Keynesian ideas.
Keynesian economics
Main
contributions by John Maynard Keynes:
- Keynes
challenged the prevailing paradigm according to which free markets would
automatically provide full employment, and underlined the important role
of government spending in achieving economic growth.
- He demonstrated
that the aggregated demand (household, business and government spending)
is the most important driving force in an economy.
- Keynes showed
that wages and prices respond slowly to changes in demand and supply
- Keynes argued
that free markets had no self-balancing mechanisms, which justifies
government intervention to achieve stability and full employment.
- Keynes defended
expansionary fiscal policy (increases in net public spending) as driver of
economic growth and criticized excessive saving.
Friedman's monetarism
Milton
Friedman's core arguments:
- Friedman
challenged the dominance of Keynesian economics by suggesting money
supply and prices are more important for economic prosperity than
government spending.
- Friedman
explained the dangers of collectivism and defended the virtues of
free-markets and capitalism.
- For him, the
main functions governments should play in the economy would be:
controlling the money supply and keeping inflation in check.
- Friedman warned
of the dangers of deflationary spirals in the case central banks are
unable to supply enough money during a liquidity cruch.
- Milton Friedman
also opposed the gold standard and his ideas contributed to its
replacement.
It is
undeniable that both of these economists have left strong legacies in social
science research; their ideas have shaped
economic policies for many decades all over the world.”
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