Keynes and Friedman: Comparing Two of the Greatest Economic Minds - Economics Essay Example
One source of contradiction between the ideas of Keynes and Friedman is in the role of the government. Keynes is concerned with full employment which basically increased the importance of policies and intervention coming from the state. He believed that laissez-faire is flawed and budget deficit accruing from the government, if ever criticized by the principles of classical economics, is justified if it is meant to contribute on job creation. The term famously attached to this claim is pump-priming the economy. The objective of Keynes in raising the extent of government intervention is to safeguard economic structures particularly to optimize the success of individualism.
Friedman, on the other hand, is an advocate of economic freedom and substantially classical economics. He is widely known in several lectures and media appearances emphasizing the individuals right on choosing freely. Using arguments that supported decentralization of power on both political and economic dimensions, he likely challenged the strength of the assertion about the interference on individual consumption and investment. This is because, for him, the role of the government is limited on state protection against foreign threats, maintaining internal peace, creation as well as enforcement of laws of exchange and monetary regulation. Beyond this point, the state intervention is risking individual freedom.
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It is important to note that Keynes, like Friedman, is an avid believer of individual freedom and its fundamental function to a satisfying life and also a healthy society. The perceivable doubt is caused by the fact that the former chose to support increase in government intervention. His aim is to improve the tenets of classical economics and contribute on how a free economy should be dealt by political forces. But Friedman, instead of finding weaknesses on a free economy, found ways on how people should continue to fear central control. As an example, he did not showed any concern of increasing the role of government despite rapid globalization.
For Keynes, there is an economic relation among savings, investment, consumption and employment. The government must intervene to maintain their sound relationship that promotes economic growth and stability. Specifically, the state is the one responsible to impose gradual reduction of interest rate, mainly the borrowing rate, to the point where the level of capital reaches full employment. With this, Keynes argued that capitalist who are the primary wealthy and drivers of savings will not benefit on inappropriate accumulation of wealth by which economic principles deemed invalid. Savings, unlike land, is not essentially scarce. This is why the economic rent applied on the former is miscalculated. In effect, Keynes is solving a macroeconomic problem in terms of full employment on one hand and promoting adjustments on microeconomic issue in terms of pricing savings on the other.
Friedman likely remained indifferent. Generally, he explained that every state-level solution has its individual-level counterpart. It is not less of a problem when the government is pulling down the interest rate successfully when the cost of doing so, that is determining the level of full employment and other specific information, is very expensive. Individual solutions are not only practical and efficient but also preserve human freedom. His debate, although not supported by his actual quote, would likely be in a tone supporting individual and necessarily firm choice. If propensity to consume is low, it can be explained that there is a motivation to save such as higher lending rate. Therefore, the invalidity of renting the savings from either wealthy or working individuals is solved by the market interaction.
From one view, the government serves as the armor and provider of the people in an expanding and ever-changing economic landscape. This concept involves conviction from political forces, managing broad macroeconomic issues and a level of sacrifice for some individual freedom. On the other, beyond Friedman’s state roles, government and individual/ firm are substitutes in deciding the fate of the economy. With decreasing state intervention, focus on comprehensive issues and promotion of economic freedom, the economic arguments of the two economists have their distinct foundation. Keynes somewhat believed that there is a system within the economic arrangements while Friedman did not go further to defining such system primarily of his fear on entering complex individual behavior where freedom is held. For example, the former is optimistic on determining the volume of employment and that there is trade or business cycle. The latter, in contrast, is puzzled why the government is tailing administration complexity and that there are no business cycles rather shocks from time-to-time.
In certain cases, the difference in the means of the arguments of the two economists contributed to similar broad ends. Keynes argued that wealthy individuals who are basically the owners of savings wrongfully enjoyed premiums pending full employment level. As a result, his criticism against the role of savings in capital growth is leading an economy towards equality and decentralization of saving capacity. This is to show, that like Friedman’s humane motive, Keynes also have the intention to improve the quality of life of most people. The latter may not be emphasizing individual freedom and favoring government intervention but the concern for the greater good is still in tact. As Friedman consented on the fact that political and economic freedom goes in pair, Keynes is also on the same end with Friedman as he explained that the inappropriate savings rents accumulated by money-making individuals is less unfriendly than resorting to tyranny of influential and wealthy people.
Friedman’s solution for an economy to achieve growth and stability, however, is natural and plain. The basic model is for the government to use its legitimate role of monetary regulation. Specifically, it should maintain a gradual rise in money supply over time. Money supply has important influence on interest rate which directly addresses the issue forwarded by Keynes. When there is an abundant supply of money in the economy, banks have more to loan thus interest rates are automatically lowered. In reverse, when there is minimal supply, banks have less to loan and there will be competing demand for loan that will cause the price of such loan to increase interest rate. The state have various ways to manage interest rate including the control of government bonds benchmarking, reserve requirement of banks and production of money. Thus, it is possible to protect individual freedom and solve macroeconomic problems through simple policies without aiming at microeconomic issues such as consumption and savings.
Going back to the role of government to pump prime the economy, Keynes have provided insight on how capitalism can be supported by public works to achieve a social organization. In one of his works, he explicitly advocated an end to full laissez-faire which induced many to believe that his economic idea is endeavoring to combine the two extremes; namely, centrally-planned and free economy structures. He argued that capitalists do not have the ability and willingness to fulfill the necessity of the society largely because they are known for money-making. It is observed that Keynes has an eye of identifying what are the sources of social evils which he also found on wealthy savers earlier. He then uses the government as the tool to ensure that the common people are not aggrieved by such self-vested interests and administer the necessary steps to avoid or solve emerging social issues within the economy.
In this respect, Keynes is in favor of budget deficits in order to solve unemployment problems and shoulder the social responsibilities that are not covered by profit-minded capitalists. He also commended the use of the state in monetary and fiscal policies in reducing the negative impact of sudden economic booms and recessions. With the increasing role of the government in the economy, Keynes is optimistic that the inability of capitalists to serve social welfare is accounted. Tax and state source of income are thus essential for this framework.
The central dividing line between the economic ideas of Keynes and Friedman lies where it all started: the role of government. Friedman, partially satirical, referred to the continuously-increasing state intervention as “priming the pump”. In this part of his work, he is likely debating against the ideas of Keynes. This is obvious especially when he explained that people in the US in the late 1930s persisted on saving or delaying their consumption albeit under a mature economy with high level of unemployment and looming investment opportunities. If Keynes ideas are in effect, the US experience did not offer the chance for the state to intervene through increased expenditures because full employment must have happened. The pump-priming of the state even after the appearance of substantial savings available for firms as means of job creation proved that the ideas of Friedman is empirically supported.
Due to the failure of the state to establish full employment in its initial endeavors, politicians used the ideas of Keynes to end-up on ever-increasing government spending until today. But with all the efforts, Friedman is again indifferent. In fact, he argued that the major source of instability in the economy is caused by the government. Both fiscal and monetary policies are flawed according to him. On the fiscal side, the high risks involved from the decisions of politicians who are using the “rule of personality” are devastating as their effects to the economy are in totality. On the monetary side, the creation of the Central Bank triggered the economic recession that plague US into the Great Depression due to the same cause.
In conclusion, the friction between the economic ideas of Keynes and Friedman is observed probably because of the time lags of their works or the varying economic conditions confronting Keynes in Great Britain and Friedman in the US. Keynes routed for revolution from classical economics while Friedman opted to stay on the status quo and refined supporting ideas towards it. It is possible, as observed in this paper, that the ideas of the two economists can be merged into same ends. However, the means of getting to an economic objective divide their ideas. It is to note, in contrast, that the two ideas are clear that the starting point of governing an economy and essentially a country is through the commitment to economic and political freedom.
Friedman, M. & Friedman, R. (1990). Free to Choose: A Personal Statement. Hard-court, Florida.
Friedman, M. (1962). Capitalism and Freedom. Phoenix Books, Chicago.
Keynes, J. (1936). The General Theory of Employment, Interest and Money. Prometheus Books, New York.
Keynes, J. (1926). The End of Laissez-Faire: The Economic Consequences of the Peace. Prometheus Books, New York.
Hollander, S. (1987). Classical Economics. Blackwell, Oxford.