The shifting orthodoxy of economics: Friedman on Keynes


I found “John Maynard Keynes” by Milton Friedman. It’s reasonably short but here are two interesting sections:

Quoting Callaghan:

Experience led to disillusionment with initial Keynesianism on the part not only of professional economists but also of policymakers. The most dramatic evidence came from James Callaghan, when he was the Labour prime minister of the U.K.—the party and the country that had gone farthest in embracing and adopting Keynesian policies. Said Callaghan in 1976, “We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists; and that insofar as it ever did exist, it only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step. That is the history of the past twenty years.”

On Keynes’s political influence:

I conclude that Keynes’s political bequest has done far more harm than his economic bequest and this for two reasons. First, whatever the economic analysis, benevolent dictatorship is likely sooner or later to lead to a totalitarian society. Second, Keynes’s economic theories appealed to a group far broader than economists primarily because of their link to his political approach. Here again, Keynes, in his letter to Hayek, said it better than I can: “Moderate planning will be safe if those carrying it out are rightly orientated in their own minds and hearts to the moral issue. This is in fact already true of some of them. But the curse is that there is also an important section who could almost be said to want planning not in order to enjoy its fruits but because morally they hold ideas exactly the opposite of yours [i.e., Hayek’s], and wish to serve not God but the devil. Reading the New Statesman and Nation one sometimes feels that those who write there, while they cannot safely oppose moderate planning, are really hoping in their hearts that it will not succeed; and so prejudice more violent action. They fear that if moderate measures are sufficiently successful, this will allow a reaction in what you think the right and they think the wrong moral direction. Perhaps I do them an injustice; but perhaps I do not.”

Commentators seem generally agreed that credit expansion is responsible for the mess we are in today, and this is an Austrian-school perspective. I hope Austrian-school economics will continue to gain popularity. As Lew Rockwell says:

[W]e are not merely talking about a school that has contributed one or two ideas, but an entirely different way of thinking about the meaning and applications of economics and a wholly different conception of the social order. Had progress in economic thought not been interrupted by Keynesian theory and the rise of positivism in the social sciences, we would not even be speaking of the Austrian school. Misesian theory would be economics proper.

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Comments & Responses

One Response so far.

  1. Steve says:

    See also ‘The Failure of the “New Economics”‘, a detailed critique of Keynes by Henry Hazlitt:

    http://www.mises.org/books/failureofneweconomics.pdf

    “I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.”