Keynes vs Friedman – What is the Mix Today?

keynesfriedman

Blog written in July, 2103.

There is plenty of discussion nowadays as to whether to bailout or not to bailout. This short blog does not have the objective of adding more in support of one option over the other. The goal is to show the mix of today’s economy in terms of Keynsian and Friedmanian models.The two opposed versions of the economy may be epitomized (albeit simplistically) by the visions of Keynes and Friedman. The state and regulations versus a de-regulated and shock-therapy philosophy. According to the Wikipedia:

“Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.”

“Friedman rejected the use of fiscal policy as a tool of demand management; and he held that the government’s role in the guidance of the economy should be restricted severely. Friedman also argued for the cessation of government intervention in currency markets, thereby spawning an enormous literature on the subject, as well as promoting the practice of freely floating exchange rates.”

We have recently analyzed the complexity of the World based on data from the World Bank (see our previous blogs). We know that for every system (such as the World’s economy) complexity ranges from a minimum value to an upper bound, known also as critical complexity. In the proximity of the lower bound things are predictable, controllable, full of deterministic rules. Like a watch movement. Close to critical complexity things are totally different. Dynamics is governed by chaos, uncertainty and is essentially highly turbulent. Like a tornado or a storm. We could, ideally, place the models of Keynes and Friedman at these extremes.Setting aside the numbers, the situation today looks more or less like this:

KF_complexity

The above result allows us to state that the global economy today is approximately 80% Friedmanian and 20% Keynsian. What is the optimal mix? Is there an optimal mix? No, there is no such thing as optimality in a dynamic, changing and turbulent setting. However, there exist many acceptable compromises and these depend on each single player in the market, on his objectives and constraints.  The point is that given the current economic situation, decisions must be made in which direction to seek the cure? More Friedman or more Keynes?

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One thought on “Keynes vs Friedman – What is the Mix Today?

  1. My opinion would support a shift further to the Keynesian side of the equation. As you suggest in your chart going heavily towards Keynes would tend to create a resemblance to the types of command economies which failed in the Eastern Bloc countries. I believe that the role of government in economics is to function as a macro-economic “shock-absorber.” Under normal functioning the government should only minimally interfere. What I believe is appropriate is for government to support the setting of standards of behavior, s.a. striving to ensure the accuracy of information and to reduce collusion in the marketplace.

    The challenge of a totally unregulated free market economy is that a completely free market will ultimately self destruct. The mechanism is quite simple. A successful player in the marketplace will tend to drive competitors out of business. Once the player becomes sufficiently dominant in the marketplace, the player is able to establish monopoly conditions that remove competition from the marketplace and thereby eliminate the freedom from the market. An argument could be made that a number of modern marketplaces (e.g. economic sectors) are effectively either monopolies or more commonly, oligopolies. It is unfortunate that, at least apparently in the USA, in many cases government actors seem to strive more vigorously to protect their political benefactors than they strive to protect their constituents. Perhaps a better way to put it is that politicians protect their financial constituents more vigorously than their electoral constituents.

    In some ways it seems that government actors claim to be Friedmanian while actually acting in Keynesian modes. The importance of funding in the US electoral system would seem to guarantee that this will occur.

    In order for a free marketplace to function, ideally,industry trade groups would ensure that their members maintain standards of honesty, integrity and safety. If trade groups are unable or unwilling to perform this function, it becomes necessary for the government to set & maintain standards. Government will only be successful in doing this if politicians are accountable to the electorate. If corruption is significant I don’t really see that either economic model matters as the dominant players in a market sector will strive to produce conditions, either economically or through regulatory means that will ensure their limited economic security without any real regard to ideas of macro-economic security.

    Perhaps the only way to ensure large scale economic security is through the education of the economic leadership in as much as such a thing would be possible given the high levels of narcissism that are often associated with people in such positions.

    I’m familiar with a definition of maturity which suggests that level of maturity corresponds to the size of the group with which you identify. As an infant you identify solely with self, this identity expands with age to include family, peers, “tribe” at various levels, nation, perhaps race or religious affinity, perhaps all of humanity or even beyond. If our economic and political leaders score low in this measure then it is unlikely that any particular economic philosophy will make much difference.

    Liked by 1 person

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