Saturday, December 02, 2006

Keynes vs. Friedman

Many a time we see and hear about renowned economists. For many of us, their sayings or research sound very esoteric, if not boring. But whether we are pursuing a serious exam like Civils or serious participants in the economic and business scenario of our country a la the stock traders and businessmen, it does help at times to understand a bit of economics. Though trying to understand theory may be a tough call, we surely can try and understand the basics of the teachings of world renowned economists.

In an excellent article, Bradford Delong, the renowned Professor of Economics of the University of California at Berkeley, had brought out the differences – straight and subtle – between the theories and view points of the Economists John Maynard Kenes and Milton Friedman; both of whom are considered the greatest of the economic thinkers of the previous century.

For those of you who love digging deep into the original; find it here.

And those of you who find that the meaning of the text presented below is too complex to comprehend, just try to follow the underlined words at least.



His framework is based on spending and demand, the determinants of the components of spending, the liquidity-preference theory of short-run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and manic excess.

His theory was one of employment, interest and money.

To Keynes’s framework, Friedman added a theory of prices and inflation, based on the idea of the natural rate of unemployment and the limits of government policy in stabilising the economy around its long-run growth trend — limits beyond which intervention would trigger uncontrollable and destructive inflation.

The experience of the Great Depression led Keynes and his more orthodox successors to greatly underestimate the role and influence of monetary policy.

Friedman, in a 30-year campaign starting with his and Anna J Schwartz’s “A Monetary History of the United States”, restored the balance. He gave prominence to monetary policy.

Friedman and Keynes both agreed that successful macroeconomic management was necessary — that the private economy on its own might well be subject to unbearable instability — and that strategic, powerful, but limited economic intervention by the government was necessary to maintain stability.

For Keynes, the key was to keep the sum of government spending and private investment stable.

For Friedman the key was to keep the money supply — the amount of purchasing power in readily spendable form in the hands of businesses and households — stable.

Keynes saw himself as the enemy of laissez-faire and an advocate of public management. Clever government officials of goodwill, he thought, could design economic institutions that would be superior to the market — or could at least tweak the market with taxes, subsidies, and regulations to produce superior outcomes. It was simply not the case, Keynes argued, that the private incentives of those active in the marketplace were aligned with the public good. Technocracy was Keynes’s faith: skilled experts designing and fine-tuning institutions out of the goodness of their hearts to make possible general prosperity — as Keynes, indeed, did at Bretton Woods where the World Bank and IMF were created.

In his view, it usually was the case that private market interests were aligned with the public good: episodes of important and significant market failure were the exception, rather than the rule, and laissez-faire was a good first approximation. Moreover, Friedman believed that even when private interests were not aligned with public interests, governments could not be relied on to fix the problem. Government failures, Friedman argued, were greater and more terrible than market failures. Governments were corrupt, inept. The kinds of people who staffed governments were the kinds of people who liked ordering others around.

5 comments: said...

hai sir you are doing great job to civilservice was an asporant for how many yrs.its great.

Anonymous said...

God I hope you don't believe the World Bank and the IMF could possibly be considered products of the "goodness of one's heart." These were both set up to maintain first world dominance. These are both set up to keep "developing" countries in debt and controlled by "developed" countries. Thinking that they are being helped is a sick illusion. Ugh.

JD/MBA from DC said...

Keynes while heavily involved in Brenton Woods was largely ignored in the set up of the Brenton Woods system - the U.S. opted for the more normal leaning Harry Dexter White procedure...Keynes was ignored yet again and his prediction that it would fail came to pass...

Where, might I ask, are you getting your information from - that you are using the Brenton Woods system as Keynes' failed plan?

Toby Thaler said...

I do not find this to be an objective analysis and comparison of Keynes and Friedman. See Wallerstein's World-Systems Analysis: An Introduction; and perhaps Naomi Klein's Shock Doctrine. For more on how the fundamental flaws in capitalism are playing out notwithstanding use of either Keynes' or Friedman's 'fixes', see Richard Heinberg's The End of Growth.

Yasmin Skinner said...

good stuff