Friedman was not a Keynesian

If you think of the world in a certain way, and someone disagrees with you, it’s natural to try to interpret their views using your mental framework.  But often the frameworks are incommensurable, and it just won’t work.  The long fruitless Keynesian/monetarist debate of the 1950s-70s is one such example.  

David Glasner has a new post trying to defend the indefensible.  I’m referring of course to Paul Krugman’s forays into the history of monetary thought.  Glasner quotes Krugman saying the following:

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.

Suppose someone told you that real business cycles models were just AS/AD.  Would you agree?  I sure hope not, as the speaker would clearly be inferring some sort of acceptance of the AS/AD model that you see in textbooks.  The one with sticky prices.  And yet it would certainly be possible to explain the RBC model using the AS/AD graph—just assume a vertical AS curve.

Models are about much more than graphs; they are ways of thinking about how the world works.  David admits that Friedman understood that monetary policy determined the price level, and that 1960s Keynesians did not.  He admits that Friedman understood that low interest rates are often a sign that money has been tight, but Keynesians did not (many still don’t.)  He could have added Friedman’s critique of the 1960s Keynesian Phillips Curve, where he was also right.  And I haven’t even gotten into the macro research that won Friedman a Nobel Prize.  But David insists that Friedman’s monetary model was simply a version of IS-LM, albeit with the interest elasticity of money demand de-emphasized, or hidden from view.  I disagree, Friedman had a radically different model of the economy, and one that in many respects (not all) turned out to be superior.  Friedman’s weakness (or strength?) was that he wasn’t able to put it all down in a single, coherent, GE model.

Put simply, if you assume the AS curve is always vertical then you have no business using the AS/AD model.  And if you think tight money usually leads to low interest rates, then the IS-LM model is basically useless.  You need a different framework.  Now if tight money always led to low interest rates, I suppose you could make IS slope upward.  But Friedman didn’t believe that either.  Nor did he believe that interest rates were the transmission mechanism for monetary policy.

Let me digress for a moment and talk about some things that David does know, but many people don’t.   “Sticky price models” are not Keynesian models.  The sticky wage/price model was the STANDARD BUSINESS CYCLE MODEL OF THE 1920s.  The one that Keynes ridiculed and mischaracterized in the GT.  Phillips Curve models are not Keynesian models.  It was invented by Irving Fisher, and refined by Friedman and Phelps in the 1960s.  Keynes did not invent the idea that the demand for money was a downward-sloping function of the interest rate.  That was already widely known, as Hicks pointed out in his famous 1937 paper, which developed the earliest version of IS-LM.

Paul Krugman probably doesn’t know any of this, but Brad DeLong certainly does.  In the late 199os DeLong wrote an article pointing out that much of modern “new Keynesianism” is actually composed of monetarist ideas.  I don’t recall the details, but presumably he mentioned the importance of the Fisher effect in interest rates, the fact that monetary policy is the driver of nominal spending over time, the expectations-augmented Phillips curve, the need for policy rules, etc.

Here’s David:

After paraphrasing some of what I had written in his own terminology, Scott quoted me in responding to a dismissive comment that Krugman recently made about Milton Friedman, of whom Scott tends to be highly protective.

Actually I’ve often criticized Friedman, although I suppose I’m “protective” when my favorite economist is dismissed by Krugman with a few snarky remarks.  I’ve pointed out that Friedman was wrong about policy lags.  He was wrong about targeting the money supply.  He was wrong to ignore market reactions to policy announcements.  He was wrong to ignore the role of the gold standard in the Great Depression.  I just wrote a 500 page book (don’t ask) which can be viewed as a sustain critique of Friedman and Schwartz.  Yet I still think their book is a masterpiece.

But I must say that I don’t recognize the dishonest ideologue portrayed in the last part of David’s post.  Friedman often changed his mind.  He admitted that he overlooked earlier monetarist work on the Depression.  He admitted that he should have paid more attention to the role of France.  He admitted that inflation targeting might be better than money supply targeting.  He also became more skeptical of the effectiveness of fiscal stimulus over time, probably for monetary offset reasons.

David continues:

Scott asked me to list some monetary ideas that I believe are in conflict with IS-LM. I have done so in my earlier posts (here, herehere and here) on Earl Thompson’s paper “A Reformulation of Macroeconomic Theory” (not that I am totally satisfied with Thompson’s model either, but that’s a topic for another post). Three of the main messages from Thompson’s work are that IS-LM mischaracterizes the monetary sector, because in a modern monetary economy the money supply is endogenous, not exogenous as Keynes and Friedman assumed. Second, the IS curve (or something corresponding to it) is not negatively sloped as Keynesians generally assume, but upward-sloping. I don’t think Friedman ever said a word about an upward-sloping IS curve.

Here I’ll admit that I’m confused.  Can someone tell me the difference between assuming the IS curve slopes upward, and assuming that a shift to the right in the LM curve causes the IS curve to shift far enough to the right so that you end up with higher interest rates and higher output?

I never use IS-LM because it makes my brain hurt too much.

PS.  I do agree with the title of David’s post.  🙂

PPS.  This comment went right over my head:

There is nothing in IS-LM that contradicts that insight; it just requires augmenting the model with a term for expectations. But there’s nothing in the model that prevents you from seeing the distinction between real and nominal interest rates. Similarly, there is nothing in MV = PY that prevented Friedman from seeing that increasing the quantity of money by 3% a year was not likely to stabilize the economy.

IS-LM is a model and MV=PY is not.  So I don’t see the analogy.

Bat signal for Nick Rowe?  David Laidler?  Robert Hetzel?  I’m in way over my head trying to debate David Glasner on the history of thought.



30 Responses to “Friedman was not a Keynesian”

  1. Gravatar of Anonymous Anonymous
    1. August 2013 at 18:09

    Meanwhile, David Beckworth argues Milton Friedman would be for Abenomics. Not one mention of interest rates in that post so maybe you are right.

  2. Gravatar of Scott Freeland Scott Freeland
    1. August 2013 at 18:23

    One problem I have with Friedman is that I never heard him mention sticky wages in a public talk about the cause of the Great Depression. He characterizes it as entirely a failure of government and not the free market, even though sticky wages are an example of market failure. Without the market failure, there’s no need for counter-cyclical policy.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. August 2013 at 18:40

    “Paul Krugman probably doesn’t know any of this, but Brad DeLong certainly does. In the late 1990s DeLong wrote an article pointing out that much of modern “new Keynesianism” is actually composed of monetarist ideas. I don’t recall the details, but presumably he mentioned the importance of the Fisher effect in interest rates, the fact that monetary policy is the driver of nominal spending over time, the expectations-augmented Phillips curve, the need for policy rules, etc.”

    I believe this is the paper you are thinking of:

    The Triumph of Monetarism?
    Brad DeLong
    Winter 2000

    “The story of 20th century macroeconomics begins with Irving Fisher. In his books Appreciation and Interest (1896), The Rate of Interest (1907), and The Purchasing Power of Money (1911), Fisher fueled the intellectual fire that became known as monetarism. But what has happened to monetarism at the end of the 20th century? The short answer is that much of this current of thought is still there, but its insights pass under another name. We may not all be Keynesians now, but the influence of monetarism on how we all think about macroeconomics today has been deep, pervasive, and subtle. Why then do we today talk much more about the “New Keynesian” economists than about the “New Monetarist” economists? I believe that to answer this question we need to look at the history of monetarism over the 20th century. One fruitful way to look at the history of monetarism is to distinguish between four different variants or subspecies of monetarism that emerged and for a time flourished in the century just past: First Monetarism, Old Chicago Monetarism, High Monetarism, and Political Monetarism.”

    This reminds me of something that Andy Harless once said:

    The old dispute between the Monetarists and the Keynesians was resolved when the Keynesians conceded all the substantive points and the Monetarists agreed to be called New Keynesians.

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. August 2013 at 18:47

    Oops! Wrong language. How about English:$FILE/EP+J4+LC+BRADFORD+DELONG+(2000).pdf

  5. Gravatar of Lars Christensen Lars Christensen
    1. August 2013 at 20:51


    David got it the wrong way around – Keynes was a monetarist (once):

  6. Gravatar of Bob Murphy Bob Murphy
    1. August 2013 at 21:02

    I’m in way over my head trying to debate David Glasner on the history of thought.

    Yeah, he’s slippery Scott. I once tried arguing about own-rates of interest with him, because I was defending Sraffa and he was defending the Austrians (!!). I still have no idea what his argument was, all I know is that I ended up wanting to eat two apples in the future.

  7. Gravatar of nickik nickik
    2. August 2013 at 00:09

    @Scott Freeland

    Sticky Prices are not a market failure. Its rational and smart not to have full flexible prices (thats impossible anyhow) when your money is gold and the goverment promises to manage everything.

    If we lived in a world where for some reason money supply jumped up and down very quickly all the time then markets would asjust.

    Not to mention that one of the biggest reason that the great depresssion was ‘great’ is that it was goverment policy to push up prices. Hoover did it by rounding up all companys and told them not to lower wages. Latter it was all about keeping up prices as well, just read about the idiotic programmes at that time.

    How is it a market failure when the market just response to goverment generated insentives (or laws in some cases).

  8. Gravatar of Daniel Daniel
    2. August 2013 at 04:44


    Do you actually believe wages are sticky downwards solely due to “government incentives” ?

    Would you actually want to live in a world where the money supply jumped up and down very quickly ?

    And what’s with this nonsense that downward stickiness is a “market failure” ?

  9. Gravatar of W. Peden W. Peden
    2. August 2013 at 04:48

    I’m with Scott and Brad DeLong on this one vs. Paul Krugman and David Glasner (it’s fascinating how these debates can end up!).


    “If we lived in a world where for some reason money supply jumped up and down very quickly all the time then markets would asjust.”

    I’m not sure about that, but I agree with the rest of your comment.

    It’s very odd to view sticky wages (and sticky prices) as “market failure”: if the government undertakes a monopoly of the money supply and creates disequilibrium in the market for money, then why is that a market failure? On that definition of market failure, we could say that if the government stopped production of postage stamps, then the concomitant economic problems were cases of “market failure” because the economy doesn’t move swiftly to an equilibrium in the market for stamps.

    There are plenty of reasons why sticky prices make sense in a world where the supply of money adjusts in line with the demand to hold money e.g. menu costs and the employer-employee trust produced by long-term nominal contracts.

  10. Gravatar of W. Peden W. Peden
    2. August 2013 at 04:59

    There is one sense in which I think Glasner has a good point (beyond the now obvious fact that the demand for money is often unstable) which is that the definition of the quantity theory of money as a proposition about the demand for money was wrongheaded.

    Don Patinkin got it right that the quantity of money is about the causal relation between money, real output and prices: a particular increase in the money has an effect on real output in the short-run but not the long-run, and on prices in both the short-run and the long-run. Under that conception of the quantity theory of money, the key text of monetarism is not “The Quantity Theory of Money Revisisted” (which IS a great theoretical improvement on Keynes’s very poor liquidity preference model) but “The Role of Monetary Policy” and that paper still looks extremely good today.

    Incidentally, Friedman gave up on the idea that the demand for money could be explained entirely without reference to interest rates no later than 1966, BEFORE he put forward the natural rate hypothesis. So if monetarism is identified with the accelerationist model of inflation/unemployment (monetary policy can only reduce unemployment below the natural rate via constant accelerating shocks to the RATE of inflation) then monetarism was born AFTER Friedman abandoned the idea that the demand for money was totally interest-rate insensitive. In fact, even as late as his 1976 lecture, he was still making some important changes to the model.

  11. Gravatar of ssumner ssumner
    2. August 2013 at 05:28

    Scott, Friedman did not favor countercyclical policy.

    Mark, Thanks, that’s a great line by Andy.

    Lars, Yes, sort of.

    Bob, I know even less about Sraffa.

    W. Peden, Those are both very good points.

  12. Gravatar of TravisV TravisV
    2. August 2013 at 05:48

    Awesome post! I can’t believe you actually hunt and peck on your keyboard.

  13. Gravatar of TravisV TravisV
    2. August 2013 at 06:09

    Ken Rogoff says we need a dove to chair the Federal Reserve:–yellen–and-the-race-to-succeed-ben-bernanke-at-the-us-federal-reserve-by-kenneth-rogoff

  14. Gravatar of MoMo MoMo
    2. August 2013 at 06:11

    I’ll just leave this here.

  15. Gravatar of Mike Tolbert Mike Tolbert
    2. August 2013 at 06:13

    I think the origin probably relates to the fact that Friedman once said in an interview “we are all kenysians now”. And then clarified it later by saying “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”

  16. Gravatar of marcus nunes marcus nunes
    2. August 2013 at 06:13

    In a recent post I eneded with:”Once again the views of Friedman beat those of Keynes”:

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. August 2013 at 06:17

    For economic history that won’t make anyone’s head hurt;

  18. Gravatar of TravisV TravisV
    2. August 2013 at 06:35

    35 minutes from now:

    Lars Christensen will be on CNBC talking about why Chuck Norris should become new fed chairman.

  19. Gravatar of TravisV TravisV
    2. August 2013 at 06:38

    Patrick R. Sullivan,

    Which video should we watch first?

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. August 2013 at 08:29

    Adam comes first, of course. (They’re only 8 minutes long)

  21. Gravatar of Basil Basil
    2. August 2013 at 11:14

    Professor, you refer to an article about how New Keynesian beliefs are highly monetarist. You say it was by Brad DeLong. Are you sure it wasn’t this Mankiw paper?

  22. Gravatar of David Glasner David Glasner
    2. August 2013 at 12:19

    Scott, Don’t worry; you’re not in way over your head; you’re doing just fine. I think that we are arguing about whether the glass is half full or half empty, actually whether it’s 55% full (you) or 55% empty (me). I didn’t say that Friedman was dishonest, but if he wasn’t, his scholarship was shoddy. He was an ideologue, and I don’t know how else you can account for his 3% rule. Sure he eventually admitted that he was wrong, but when the evidence against you is that overwhelming, it’s more embarrassing not to admit than to admit. Before admitting that the Bank of France had something to do with the Great Depression, he spent 30 or 40 years claiming that the Great Depression was basically caused by the failure of the Bank of United States. Oh, just curious, where and when did he admit that he overlooked earlier monetarist work on the Great Depression and whose work was he talking about?

  23. Gravatar of Jeff Lim Jeff Lim
    2. August 2013 at 13:50

    Glasner/Krugman is using the same old argument James Tobin (Friedman’s major Keynesian adversary)used to use–that the primary difference between monetarists and Keynesians was that monetarists assumed zero interest elasticity (or very low)of money demand and Keynesians did not. Friedman rejected that characterization outright. Why are these people resurrecting the same old nonsense? It’s so ancient history; and kind of ridiculous. Krugman overlapped many many years with Friedman; he knew Tobin’s and Friedman’s work. Why bring up such nonsense now?

  24. Gravatar of W. Peden W. Peden
    2. August 2013 at 15:51

    Jeff Lim,

    “Why bring up such nonsense now?”

    A shortage of good arguments? In Germany in WWI people ate dogs and zoo animals, which look tasty when you’ve got nothing but turnip as an alternative. Similarly, people using bad arguments probably are in want of better arguments.

  25. Gravatar of ssumner ssumner
    2. August 2013 at 19:11

    Thanks Travis.

    Momo, Yup, they’re both macroeconomists.

    Marcus, That’s a pretty serious error by Bartlett, linking dollar depreciation and the NIRA.

    Basil, No, it was DeLong. Mark Sadowski found the link above.

    David, I think it’s pretty widely known that he admitted in print that Clark Warburton had anticipated much of his analysis. Here’s what Lars Christensen had to say:

    In the introduction to Milton Friedman’s and Anna Schwartz’s “Monetary History” they wrote:

    “We owe especially heavy debt to Clark Warburton. His detailed and valuable comments on several drafts have importantly affected the final version. In addition, time and again, as we came to some conclusion that seemed to us novel and original, we found he had been there before.”

    That seems pretty generous to me.

    Jeff, In fairness to David, I think he is making a more nuanced point than some of the others, that Friedman’s demand for money function looks suspiciously Keynesian. But obviously I agree that Friedman approach was quite non-Keynesian

  26. Gravatar of AldreyM AldreyM
    3. August 2013 at 04:35

    “Tlhanks to Wicksell, we are all acquainted with the concept of a
    “natural”rate of interest and the possibility of a discrepancy between the “natural”and the “market”rate. The preceding analysis of interest rates can be translated fairly directly into Wickse]lian terms.”

  27. Gravatar of Browsing Catharsis – 08.05.13 | Increasing Marginal Utility Browsing Catharsis – 08.05.13 | Increasing Marginal Utility
    5. August 2013 at 04:01

    […] -Scott Sumner, “Friedman was not a Keynesian.” […]

  28. Gravatar of Second Thoughts on Friedman | Uneasy Money Second Thoughts on Friedman | Uneasy Money
    5. August 2013 at 20:34

    […] the Chicago oral tradition. These are basically the same arguments that Scott Sumner used in the post that he wrote defending Friedman against my recycling of the Patinkin/Johnson […]

  29. Gravatar of Isn’t Economic History grand | TVHE Isn’t Economic History grand | TVHE
    8. August 2013 at 12:01

    […] Scott Sumner comes out and says Friedman wasn’t Keynesian, wasn’t as ideologically straightjacketed as these two seem to be implying, and that the sticky price models used (implicity?) by Monetarists and Keynesians were pre-Keynesian. […]

  30. Gravatar of Leijonhufvud on Friedman | Uneasy Money Leijonhufvud on Friedman | Uneasy Money
    13. August 2013 at 18:53

    […] on Don Patinkin and Harry Johnson, claim, or whether Friedman was a resolute anti-Keynesian, as Scott claims. We have been trading extended quotations from the literature to try to support our […]

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