All Commentary
Wednesday, July 1, 1998

Milton Friedman, Ex-Keynesian

Friedman Flirted with Keynesian Economics in the Early 1940s

“I had completely forgotten how thoroughly Keynesian I then was.”

—Milton Friedman[1]

What?! The world’s most famous free-market economist a former Keynesian?

Yes, it’s true. One of the more remarkable revelations in Milton and Rose Friedman’s new autobiography, Two Lucky People, is Milton Friedman’s flirtation with Keynesian economics in the early 1940s. During his stint with the Treasury Department, Friedman was asked to give testimony on ways to fight inflation during World War II. His reply, couched in Keynesian ideology, mentioned several options: cutting government spending, raising taxes, and imposing price controls. Amazingly, nowhere did he mention monetary policy or controlling the money supply, the things Friedman is famous for today.

During the 1930s, Friedman had also favored Keynesian-style deficit spending as a way out of the Great Depression. His mentor was not Keynes himself but Friedman’s teachers at the University of Chicago. Friedman recounts, “Keynes had nothing to offer those of us who had sat at the feet of [Henry] Simons, [Lloyd W.] Mints, [Frank] Knight, and [Jacob] Viner.”[2] In short, Chicago economists were Keynesian before Keynes.

In his autobiography, Friedman says he was “cured” of Keynesian thinking “shortly after the end of the war,” but doesn’t elaborate. In a recent letter, he denies ever being a thorough Keynesian. “I was never a Keynesian in the sense of being persuaded of the virtues of government intervention as opposed to free markets.” It should also be pointed out that Friedman’s teachers at Chicago blamed the Great Depression on “misguided government policy.” Friedman indicates he was “hostile” to the Keynesian idea that the Depression was a market phenomenon.[3]

Despite these statements, many free-market economists have long accused Friedman of being a quasi-Keynesian.

On December 31, 1965, Time magazine put John Maynard Keynes on the cover and quoted Friedman as saying, “We are all Keynesians now.” Later, Friedman said he was quoted out of context. “In one sense, we are all Keynesians now; in another, no one is a Keynesian any longer. We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions.”[4]

In an article published in 1986, Friedman glorified Keynes as a “brilliant scholar” and “one of the great economists of all time.” He described The General Theory as a “great book,” although he considers his Tract on Monetary Reform as his best work. Moreover, he declared, “I believe that Keynes’s theory is the right kind of theory in its simplicity, its concentration on a few key magnitudes, its potential fruitfulness.”[5]

Many conservatives wonder how Milton Friedman, defender of free markets, could speak so highly of a man considered the intellectual architect of the postwar inflation and the modern welfare state.

Friedman is known as the leader of the Monetarist opposition to the Keynesian revolution. According to Friedman, monetary policy (manipulation of the money supply and interest rates) influences economic activity far more than fiscal policy (taxes and government spending). Yet it must be remembered that monetary and fiscal policies are both forms of state intervention in the economy. Accordingly, some free-market advocates see Keynes and Friedman as partners in crime.

Granted, Friedman, as opposed to the Keynesians, favors a strict limit on monetary growth. Yet even Friedman occasionally succumbs to interventionist fever. Late last year he endorsed this remedy for Japan’s sluggish economy: print more money. Apparently Friedman felt that the easy-money policy in effect in Japan since 1994 (recent M1 was growing at 9.9 percent, M2 at 4.3 percent) was insufficient. “The surest road to a healthy economic recovery,” he wrote, “is to increase the rate of monetary growth.” What about tax relief, deregulation, and open markets? Friedman failed to list any of these options,[6] Undoubtedly he favors these remedies, but the article rekindled the old accusation that “only money matters” to Friedman.

Friedman the Anti-Keynesian

I have to admit that, like many free-market economists, I am surprised by these findings and the favorable comments Friedman has made about Keynes. I’ve always viewed the leader of the Chicago school as strongly anti-Keynesian. His Monetary History of the United States clearly contradicts Keynes’s contention that the capitalist system is inherently unstable.[7] The book shows that the Fed’s inept policies, not free enterprise, caused the Great Depression. Friedman’s permanent-income hypothesis modifies Keynes’s consumption function and undermines the case for progressive taxation. His natural-rate-of-unemployment doctrine denies any long-run trade-off between inflation and unemployment (the Phillips curve). In Capitalism and Freedom, Friedman challenges the effectiveness of the Keynesian multiplier and declares that the federal budget is the “most unstable component of national income in the postwar period.”[8] And, as early as 1963, he labeled as “erroneous” the Keynesian proposition that the free-market economy an be stuck indefinitely at less than full employment.[9]

So where does that leave us? In one of the more controversial contributions to my edited volume Dissent on Keynes, Roger Garrison of Auburn University asks, “Is Milton Friedman a Keynesian?” Garrison contends he can argue it either way. Indeed. Yet, in the final verdict, I can’t help but think that Friedman, as an open-minded scholar, is willing to investigate and test all theories, no matter their source, and this methodology has gradually led him to discard most of Keynesianism. As he himself has written, “I have been led to reject it . . . because I believe that it has been contradicted by experience.”[10]


  1. Milton and Rose Friedman, Two Lucky People (Chicago: University of Chicago Press, 1998), p. 113.
  2. Milton Friedman, “Comments on the Critics,” in Robert J. Gordon ed., Milton Friedman’s Monetary Framework (Chicago: University of Chicago Press, 1974), p. 163.
  3. “Comments on Critics,” pp. 48-49.
  4. Milton Friedman, “Why Economists Disagree,” Dollars and Deficits (New York: Prentice-Hall, 1968), p. 15.
  5. Milton Friedman, “Keynes’s Political Legacy,” in John Burton, ed., Keynes’s General Theory: Fifty Years On (London: Institute of Economic Affairs, 1986), pp. 47-48, 52.
  6. 6.   Milton Friedman, “Rx for Japan: Back to the Future,” Wall Street Journal, p. A22, December 17, 1997.
  7. With Anna J. Schwartz (Princeton, N,J.: Princeton University Press, 1963).
  8. Milton Friedman, Capitalism and Freedom (Chicago! University of Chicago Press, 1962), p, 76,
  9. Milton Friedman and David Meiselman, “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958,” in E. Cary Brown, et al., ed., Stabilization Policies (New York: Prentice-Hall, 1963), p. 167. See also Friedman’s recently published article, “John Maynard Keynes,” Economic Quarterly, Federal Reserve Bank of Richmond, 83/2, Spring, 1997.
  10. “Keynes’s Political Legacy,” p. 48.

  • Mark Skousen is a Presidential Fellow at Chapman University, editor of Forecasts & Strategies, and author of over 25 books. He is the former president of FEE and now produces FreedomFest, billed as the world's largest gathering of free minds. Based on his work “The Structure of Production” (NYU Press, 1990), the federal government now publishes a broader, more accurate measure of the economy, Gross Output (GO), every quarter along with GDP.