David Warsh: The split records of Keynes and Friedman

SOMERVILLE, Mass.

From the beginning I have been convinced that Milton Friedman possessed a dual personality, somewhat like Doctor Jekyll and Mister Hyde: a strong economist by day, a weak citizen by night. Nothing I’ve read and written about in the last nine weeks has convinced me otherwise, not even Edward Nelson’s meticulous explication ofFriedman’s professional life from 1929 to 1972.

Instead, my suspicions have grown with the passage of time that with John Maynard Keynes, it was the other way around. What if Keynes was a weak technical economist, but a strong citizen by night? Turning things on their heads after seventy-five years requires time, a critical biography by a first-rate economist in the future, and, in my case, not much more than cheek. I’ll sketch the bare bones of the argument here, and hope to return to it someday.

This puts me up against the judgment of Nelson and, worse, of Friedman himself. In Newsweek magazine, in 1970, he wrote:

“Now John Maynard Keynes was one of the greatest economists of all time. I know many people who regard him as a devil who brought all sorts of evil things into this world – he was not that; he was like rest of us; he made mistakes. He was a great man, so when he made mistakes, they were great mistakes. But he was a great man.”

But I am a journalist, not an economist, and it’s the mistakes that interest me, one of them in particular: his diagnosis of the causes of the Great Depression.  Keynes regarded it as, like any recession, a drop in aggregate demand, moving economic output below the production capacity of the economy. In such circumstances, he argued, governments should counter recessions through an expansionary fiscal policy that boosts aggregate demand.

Friedman and his research partner Anna Schwartz advanced a different explanation of the Great Depression in their A Monetary History of the United States 1867-1960. Ben Bernanke, a leading scholar of the decade of the 1930s, before he became a central banker, summarized their argument this way: “central bankers’ outmoded doctrines and flawed understanding of the economy had played a crucial role in that catastrophic decade, demonstrating the power of ideas to shape events.”

In 2007-08. Federal Reserve Chairman Bernanke, with the help of many others, forcefully demonstrated the power of better ideas. Together, they saved the world from a Second Great Depression.

Keynes may have had many brilliant ideas as an economist, but his single greatest success came as a journalist.  The Economic Consequences of the Peace, his 1919 book, fiercely criticized the harsh reparations demanded of Germany in the wake of World War I, correctly foresaw the causes of World War II, and supplied the foundations of the 1947 Marshall Plan, aimed at the reconstruction of Germany, not punishment for its many sins.

My friend, Peter Renz like me, a non-economist, described the essence of Keynes this way: “a romantic figure. A polymath, brilliant as a writer, alive with charm as a lover, witty, political, a man of business and action.”

In this view, Keynes, born in 1883, was the last eminent Victorian of a certain sort. He was not included in that volume of portraits written by Keynes’s friend Lytton Strachey. Perhaps he, along with Friedman, will appear in a volume by some latter-day Strachey. (The figment of my imagination is the tenth good book). Meanwhile,  I can’t do better than Wikipedia’s summary of the original:

“Eminent Victorians is a book by Lytton Strachey (one of the older members of the Bloomsbury Group), first published in 1918, and consisting of biographies of four leading figures from the Victorian era. Its fame rests on the irreverence and wit Strachey brought to bear on three men and a woman who had, until then, been regarded as heroes: Cardinal Manning, Florence Nightingale, Thomas Arnold and Gen. Charles Gordon. While Nightingale is actually praised and her reputation enhanced, the book shows its other subjects in a less-than-flattering light, for instance, the intrigues of Cardinal Manning against Cardinal Newman.”

And Friedman?  He had two great successes as an economist. One of them should be clear by now. That single chapter of the Monetary History makes engrossing reading. It has its flaws – the significance it assigns to the 1930 failure of the grandly named Bank of the United States,  a hastily assembled commercial bank in New York City, chartered in 1913, seems overblown – but overall,  Friedman’s and Schwartz’s analytic narrative of the series of banking panics that unfolded 1930-33 is convincing.

Friedman’s other achievement is more diffuse but more important.  He brought monetary analysis back into the big tent of economics that that had been dominated for more than a century by analysis of “real” goods and services by the forces of supply and demand.  I keep on the shelf above my desk two little Cambridge Handbooks of 1922, Supply and Demand, by H. D. Henderson, and Money, by D. H. Robertson.

That was the situation before Keynes.  In his General Theory, he sought to unite them, but the makers of macroeconomics who followed him somehow have failed to come up with an account of a business cycle without periodic financial crises.

“Monetarism,” a slogan that Friedman is said to have disliked, as opposed to “monetary theory,” doesn’t do much better, but at least it puts central banks back in the the story. As for rules as an alternative to occasional discretion, as a means of deflecting the occasional crisis?  I doubt it.

And Friedman’s dark side? Nothing worse than being the most prominent  spokesman for an exaggerated version of the common failing of today’s economics – its emphasis on the role of the individual, at the expense of attention to his/her/their entanglement in society (in Herbert Gintis’s phrase).  British Prime Minister Margaret Thatcher famously proclaimed “There’s no such thing as society.”  That’s bunk, even worse than macro without crises.

At least the tale of Jekyll and Hyde is the story one journalist has to tell.

David Warsh, a veteran columnist and an economic historian, is proprietor of Somerville-based economicprincipals.com, where this essay first ran.