Was Milton Friedman a Closet Keynesian? « Uneasy Money: WCommenting on a supremely silly and embarrassingly uninformed (no, Ms. Shlaes, A Monetary History of the United States was not Friedman’s first great work, Essays in Positive Economics, Studies in the Quantity Theory of Money, A Theory of the Consumption Function, A Program for Monetary Stability, and Capitalism and Freedom were all published before A Monetary History of the US was published) column by Amity Shlaes, accusing Ben Bernanke of betraying the teachings of Milton Friedman, teachings that Bernanke had once promised would guide the Fed for ever more, Paul Krugman turned the tables and accused Friedman of having been a crypto-Keynesian.
The truth, although nobody on the right will ever admit it, is that Friedman was basically a Keynesian — or, if you like, a Hicksian. His framework was just IS-LM coupled with an assertion that the LM curve was close enough to vertical — and money demand sufficiently stable — that steady growth in the money supply would do the job of economic stabilization. These were empirical propositions, not basic differences in analysis; and if they turn out to be wrong (as they have), monetarism dissolves back into Keynesianism.
Krugman is being unkind, but he is at least partly right…. Friedman somehow got it into his head that he could get away with repackaging the Cambridge theory of the demand for money — the basis on which Keynes built his theory of liquidity preference — and calling that theory the quantity theory of money, while ascribing it not to Cambridge, but to a largely imaginary oral tradition at the University of Chicago. Friedman was eventually called on this bit of scholarly legerdemain by his old friend from graduate school at Chicago Don Patinkin, and, subsequently, in an increasingly vitriolic series of essays and lectures by his then Chicago colleague Harry Johnson. Friedman never repeated his references to the Chicago oral tradition in his later writings about the quantity theory…. But the simple fact is that Friedman was never able to set down a monetary or a macroeconomic model that wasn’t grounded in the conventional macroeconomics of his time….
Friedman’s intellectual forbears were really W. C. Mitchell and Friedman’s teacher at Columbia Arthur Burns from whom Friedman was schooled in the atheoretical, empirical approach of the old NBER founded by Mitchell.
But Krugman is not totally right either. Although Friedman obviously liked the idea that the LM-curve was vertical, and liked the idea that money demand is very stable even more, those ideas were not essential to his theoretical position. (Whether the stability of the demand for money was essential to his position would depend on whether Friedman’s 3-percent growth rule for the money supply is central to his thought. Although Friedman obviously loved the 3-percent rule, I don’t think that objectively it was really that important to his intellectual position, his sentimental attachment to it notwithstanding.) What really mattered was the idea that, in the long run, money is neutral and the long-run Phillips Curve is vertical. Given those assumptions, Friedman could argue that ensuring reasonable monetary stability would lead to better economic performance than discretionary monetary or fiscal policy. But Friedman, as far as I know, never actually considered the possibility of a negative equilibrium real interest rate. That’s why, when we look for guidance from Friedman about the current situation, we can’t be completely sure what he would have said. His comments on Japan suggest that he would have indeed favored quantitative easing. But inasmuch as he did not explicitly advocate inflation, supporters and opponents of QE can make a case that Friedman would have been on their side…
I don't understand. In what way is our situation different from the situation in Japan for which Friedman said that QE was the right policy? Friedman's core position was that when there was insufficient liquidity (on his definition) in the economy you printed high-powered money. Would he dispute that there is insufficient liquidity (on his definition)? Would he dispute that his core position was was that when there was insufficient in the economy you printed high-powered money? Or would he say that this time is different?
Seems to me that unless you make a case for one of those three, Krugman wins by the clear and convincing evidence standard. Failing to state a case and claiming reasonable doubt doesn't work here.