Adam Smith may the father of economics but his economic policies are not largely followed today. The two main schools of thought discussed today are those of John Maynard Keynes and Milton Friedman. Both men had different theories on what builds wealth in capitalism and drives the economic engine that is the United States economy.
Keynesian Economics
Keynes philosophy entails governmental intervention during recessionary and depressionary times. The federal government has a role in the economy along with the private sector. Keynes believed that the government has to step in during difficult economic times and provide demand for products and services. Without demand, unemployment would persist and the economy would spiral into a severe depression. The government is the spender of last resorts. Spending, even if it creates a deficit, is needed to prevent depression like unemployment.
Friedman Economics
Friedman had the exact opposite view. Friedman was an advocate for a stable money supply. He was against government regulation and believed that the actions of government has very little effect on the economy. The best thing that the government can do is seek a small expansion of the money supply. His theory became known Friedman believed in keeping the supply of money and the demand for money at the exact same levels.
The most famous recent monetarist is Alan Greenspan and the most famous recent Keynesian is Paul Krugman. Democrats tend to be Keynesians and Republicans tend to be Friedman followers.
Which economist do you think is correct?
I am more Keynesian than a Friedman follower, however I would rather pick and choose elements of both. For example, at the depth of this recession, government needed to do something, but not necessarily what they did. I believe in regulation to protect society, but again not exactly what is done. Too much influence by vested interests in creating regulation. Maybe the best choice is libertarian. I try to control the things I can in my own life.
Interesting response.
Friedman always claimed to be libertarian (in the truest definition of the word). His definition of government control isn’t to keep them out at all costs – but a much simpler form of government that has a hand in very defined areas (national defense, public goods – roads, parks, museums, etc; — not social programs of every kind). (His explanation is made clear in his book Free To Choose)
We won’t ever implement 100% of one economists views – that just wouldn’t fly in Washington. I would, however, lean towards Friedman’s views over the Keynesian school of thought.
I am a Keynesian. What the government does has a direct effect on the economy. What many people forget is that Keynes also believed that when the economy was functioning correctly, there was no need for government intervention.
This last recession, however, we saw intervention with both. The Fed loosened the money supply, and the government spent. That was from lessons learned from the Great Depression. When the first recession hit, the government spent to get out, but then the deficit hawks started cutting spending, and the Fed tightened lending. It ended up plummeting the country into the depression.
I think both avenues are needed when the economy tanks. If it is only a mild slowdown, you can start with the money supply. Once interest rates are 0%, all there is left to do is spend…
Monetarist with slight flucuations. Keynes was a scoundrel of the highest order who left behind instructions for Statist’s to capture the wealth of the people so government could decide what is best!
Anything without some regulation is a bad thing. It is either little intervention now to keep things moving smoothly or major intervention later (bailouts anyone?). Either way, the government has to get involved. The question is when.
Think about intersections without traffic lights. (You know where I stand!)
I tend to be a Friedman follower but there needs to be some governmental oversight to establish a level playing field in the market. Enron and Madoff should never have happened and when situations like that do occur, there need to be swift and severe penalties to prevent recurrence.
The biggest impairment to the “American Dream” in this country is inflation. Upward mobility is becoming increasingly difficult for the majority of Americans. I fear we are turning into a “caste” society. However, I would point out that there are still plenty of opportunities for those with high motivation.
I agree with Friedman much more than Keynes. I’m reading through some his works (Free to Choose, Capitalism and Freedom, and now Money Mischief) and the theories he support make sense for individuals and business much more than the ‘strong hand of the Government’ view Keynes supported.
I haven’t read that one. I will need to take a look at it.