Opposing Keynesianism: Friedman and the Rise of Monetarism

Milton Friedman (1912–2006) is closely associated with Monetarism and Chicago economics. The tenets of Chicago economics—freer trade and sharp critiques of government intervention—became world famous after the Second World War. Friedman strongly disagreed with the Keynesian claim that markets, left to themselves, might lead to suboptimal performance that could only be corrected via policy interventions. This fundamental dispute was the source for Hayek’s and Friedman’s common ground. Friedman’s position on monetary policy emphasized the need to adopt a strict rule to control the system and avoid the major source of instability in capitalism. Monetarism argued that monetary aggregates could explain both the secular, long run trends and the cyclical, short term changes. The Monetarist-Keynesian debate on the role of governments and the efficiency of macro policies, particularly monetary policy, heated up in the late 1960s with the stagflation that spread in many economies, revealing the uncommon pairing of unemployment and inflation, hence stagflation.