Friedman and Keynes: Economics and Psyche

Milton Friedman (1912-2006), who died last November 16 at age 94, had many profound similarities and equally deep dissimilarities with the generation-older John Maynard Keynes (1883-1946). Both were unqualifiedly great men and great economists, more specifically, monetary economists. Each was superbly certain he was right and the other wrong on fundamentals of economic theory and policy: right and left pillars in the life-and-death game of economics. We live suspended between them.

If they agreed on the centrality of money in the economy, they disagreed absolutely on the role of government and the amount of freedom to be permitted in free enterprise. As early as December 10, 1929, when Great Britain was submitting to the early onslaught of the Great Depression, Keynes as policymaker had proposed an “Economic General Staff’ in a memorandum to Prime Minister J. Ramsay MacDonald. This would “engage in a continuous study of current problems affecting national economic policy” to achieve “the deliberate and purposeful guidance of our economic life.” He was pointing the way to Britain’s Economic Section of the Cabinet Office, a permanent policymaking body, and to the comparable Council of Economic Advisers to the president of the United States. Opposing this advice on principle, Friedman wrote a rebuttal in his Capitalism and Freedom (1962) that advocated keeping the role of government to a minimum in a free-market country. This would promote, he argued, the greatest freedom and well-being. Both men were contradicting the overt social circumstances of their lives.

Maynard Keynes was a child of privilege. He was the eldest child of three of a don, presently the registrary, or chief executive officer, of Cambridge University and heir of a prosperous flower grower. John Neville and John Maynard were logicians and economists, the first of impeccable scholarly distinction, the second, insistently greater. Maynard grew up in absolute economic security as a member of the elite-Eton student, Cambridge University graduate, briefly India Office official, then back to Cambridge as don himself, next a reputation-making spell in the Treasury during World War I, and then more distinction as a charismatic six-foot lecturer flourishing a guardsman’s mustache. Despite his superb presence, he was a frail vessel suffering a lifetime of depression, surviving inexplicable childhood fevers, then as a young man, going on to survive diphtheria, appendicitis (requiring an emergency operation on his kitchen table), pneumonia, and influenza, and dying of a heart attack in his sixty-third year after a first massive attack making him a cardiac invalid, but a

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most energetic one, nine years earlier. Despite these distresses he was a compulsive worker who combined teaching, college and university administration, government service, editing, and writing articles and books. He was a revolutionary thinker as a self-styled “democratic socialist” and a theorist of a populism-flavored economic theory promising more for the common man.

The diminutive but enduring Friedman, who grew up into the Great Depression, was the son of a struggling Jewish jobber commuting to New York City and a hard-working mother who ran the family dry-goods store in Rahway, New Jersey. The family included three older girls and young Milton, the only one to go to college. The father died when Milton was fifteen. Helped at times by an older working sister, he was enterprising enough to think of selling shirts and socks with the college colors at Rutgers College to pay his way through school. He also set up a tutoring operation so prosperous that a senior professor snatched it away from him. His private economics lesson was: be smart, work hard, and make a good life. He organized and articulated his economic philosophy around it. Despite poverty and anti-Semitism, and an initial lack of academic positions, Milton discovered economics as a natural field and moved on from one success to another.

Why did the one seek to overturn economics as taught and the other to develop and purify its principles? Of course the prime reasons go back to the personal and family origins.

Maynard was the favorite child since his father Neville fell in love with him, crowding out the mother in the early years. Until Maynard went to Eton, Neville had him working in his study. This close relationship was given acute edge because the loving but Victorian father felt obliged to correct his intermittently naughty boy by “whippings” (his and his wife’s term), while also giving and demanding affection. Maynard could not help loving and hating his father. His first major work subverted the logic John Neville taught (published in two modest classics) and his ultimate work overturned the paternal neoclassical economics. At Eton, while duly following his father’s strategy to win a great array of prizes, he entered the homosexual world. Afterward he spent two decades cruising the gutters of Cambridge and London for pickups, methodically recording and counting his experiences. Yet he liked women, beginning with his slightly distant but loving mother, and in his later thirties swung around and happily married another star, the ballerina Lydia Lopokova. Though he did not have children he lavished attention and gifts on his nephews and nieces. He had also become a charter member of the artist-and-writer Bloomsbury group, which reinforced his leaning toward the unconventional.

Rising up out of his family’s poverty, young Friedman never expressed a sense of deprivation, insecurity, or discrimination. His terrific competence and positive attitude won him academic patrons and friends. He collaborated on his first book with his dissertation adviser, Simon Kuznets, a distinguished econometrician. He became a close friend and collaborator of George J. Stigler, a fellow economist at the University of Chicago, where he eventually arrived. Both collaborators, like Friedman himself, became Nobel laureates. Friedman also collaborated with Anna J. Schwartz, a fine economist, on their monumental Monetary History of the United States (1963). Working closely with another woman evidently did not disturb his wife Rose, a competent economist herself who also collaborated with him on other projects. After suffering the loss of a first child at birth, the Friedmans were the happy parents of a son and a daughter, the son becoming an economics professor extending his father’s ideas to the point of anarcho-capitalism. Friedman, with a likable personality despite his verbal aggressions, commanded respect and even awe despite his unprepossessing exterior measuring perhaps five feet, three inches, invited the world to join him in working hard and enjoying the fruits thereof. His armament consisted of great technical skill in economic theory and equal power in communicating with the lay public. To achieve his ends society should provide the maximum freedom. For him it was that simple.

The reactions of both Keynes and Friedman to the Great Depression were characteristic of their fundamental thinking and, before that, their feelings. Keynes, who had long taught the established neoclassical economics, increasingly doubted many of these. After writing a treatise on logic and one on money in the neoclassical sense, he responded by writing his General Theory of Employment, Interest, and Money from 1930 to 1936. In it he denied the neoclassical teaching that the economy was self-correcting, as Friedman deeply believed. His new view resonated

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deeply during the Depression.

To the contrary, in his Monetary History, Friedman argued that the economy was indeed self-correcting but that the U.S. government had gratuitously upset it. The Federal Reserve System (FRS), he charged, had failed to manage the monetary supply correctly with an “expansionary course” to head off the Depression in an argument I see as uncharacteristically unclear and vulnerable. It contradicted his emphasis on private, rather than governmental, action and the impact of the enormous unemployment, high tariffs, the impoverishment of Europe, and political developments such as the rise of Hitler.

This is where Keynes made the necessary corrections, agreeing with many of Franklin Delano Roosevelt’s vigorous actions during the early Hundred Days of his administration and seeing as crucial to saving the economy deficit spending and the expansion of the money supply. This method worked. The proof came when FDR, belabored by conservatives for bankrupting the economy, began to reduce the deficit, and the country lapsed into the recession of 1938. Shaken by the rise in unemployment, the government resumed spending-and the numbers of the unemployed fell, with World War II then ending the Great Depression.

Both economists had been right and wrong; both had given monetary policy too large a role. Like Friedman’s prescriptions, Keynes’s General Theory was a false view of the economy. The Great Depression had not been caused by feeble consumption and excessive interest rates as determined by greedy holders of funds. As would be shown in the 1970s, the inflation that had begun to save the economy of the 1930s eventually began to dominate the Western economies with negative effect. This was the time of stagflation when inflation was accompanied by unemployment. At this point Friedman’s free economy proceeded to correct the inflationary imbalance under the effects of burgeoning production and competition. But then Friedman had to admit implicitly that the government nevertheless played an important role, even when it stopped regulating so much and began to privatize economic sectors in his sense. The point was a balanced “Third Way” developed by the Conservative Margaret Thatcher and the Labourite Tony Blair in England, and Bill Clinton in the United States.

I have been simplifying as did Friedman and Keynes. But the best corrective of cither’s certainties was the other’s certainties: more Friedmanite free enterprise, thus less regulations, in general business activities, but also more strategic governmental direction of the economy at the top level according to Keynes. Between the two, where should we select the precise spot? It would be easy to split the difference between them. But the economy is still too mysterious to be managed so simply. To solve the newer problems all it takes is common sense and transcendent genius.

Both Friedman and Keynes had been living out their psychic origins. Friedman could excuse his father’s lack of success by the fact of the Depression and his early death. At home, with a sympathetic family, he could go on to his own success as generated by his abilities, which confirmed his sense of a free-enterprise economy with its rational rewards. Keynes, on the contrary, felt driven to correct his lovingly oppressive father and the free economy he saw as too vulnerable to malfunction. In both cases these great economists were true to themselves and the reality, personal and economic, they had experienced.

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