Friedman vs. Keynes

Attribute	Friedman	Keynes
View on government intervention	Minimal government intervention in the economy	Advocated for government intervention during economic downturns
Monetary policy	Believed in controlling inflation through monetary policy	Advocated for government control of interest rates to stimulate or slow down the economy
Role of expectations	Emphasized rational expectations and market efficiency	Believed in the importance of animal spirits and psychological factors in economic decision-making
Employment	Believed in the natural rate of unemployment	Advocated for government intervention to reduce unemployment during economic downturns

Background

Milton Friedman and John Maynard Keynes are two of the most influential economists of the 20th century. They both made significant contributions to the field of economics, but their views on economic policy and the role of government in the economy were quite different.

Beliefs on Government Intervention

Friedman was a proponent of free-market capitalism and believed that government intervention in the economy should be minimal. He argued that the market should be left to regulate itself, as individuals acting in their own self-interest would lead to the most efficient allocation of resources. In contrast, Keynes believed that government intervention was necessary to stabilize the economy during times of recession or depression. He advocated for government spending to stimulate demand and reduce unemployment.

Monetary Policy

When it comes to monetary policy, Friedman and Keynes also had differing views. Friedman was a strong advocate of monetarism, which emphasizes the importance of controlling the money supply to achieve economic stability. He believed that changes in the money supply could have a significant impact on inflation and economic growth. Keynes, on the other hand, believed that monetary policy was not as effective as fiscal policy in influencing economic activity. He argued that central banks should focus on managing interest rates to stimulate or cool down the economy.

Views on Inflation

Another area where Friedman and Keynes differed was their views on inflation. Friedman believed that inflation was primarily a monetary phenomenon, caused by an increase in the money supply. He argued that central banks should focus on controlling inflation by keeping the money supply stable. Keynes, on the other hand, believed that inflation could be caused by a variety of factors, including changes in aggregate demand and supply. He believed that moderate inflation could be beneficial for the economy by encouraging spending and investment.

Long-Run vs. Short-Run

One of the key differences between Friedman and Keynes was their focus on the long-run versus the short-run. Friedman believed that the economy would naturally tend towards equilibrium in the long run, and that government intervention could have unintended consequences. He argued that policymakers should focus on creating a stable economic environment to allow markets to function efficiently. Keynes, on the other hand, believed that in the short run, the economy could deviate from full employment equilibrium due to fluctuations in aggregate demand. He advocated for government intervention to stabilize the economy in the short run, even if it meant running budget deficits.

Legacy

Both Friedman and Keynes have had a lasting impact on economic thought and policy. Friedman's ideas on monetarism and the importance of free markets have influenced policymakers around the world. His work on the relationship between inflation and the money supply is still studied by economists today. Keynes's ideas on government intervention and the role of aggregate demand in shaping the economy have also had a lasting impact. His advocacy for fiscal stimulus during times of economic downturns has been adopted by many governments.