The Monetary Theories of Milton Friedman and J. M. Keynes: A Comparison

For two decades, Milton Friedman has contended that the monetary theory of John Maynard Keynes is highly special, applicable only to conditions of deep depression. He continues to cite Keynes' dependence on a condition of absolute liquidity preference, commonly called the liquidity trap, as the theoretical basis for Keynes' unemployment "equilibrium." Friedman believes that Keynes' The General Theory was based on this underlying premise, so that its results are correct only in this special circumstance. Therefore, Friedman contends that Keynes regarded monetary policy as ineffective. Additionally, Friedman criticizes all economists in the Keynesian tradition because they adopt a narrow "credit" view of monetary policy while his theory is based on a broad "monetary" view. This study investigates Friedman's charges in reference to Keynes' The General Theory, and in the process a study is made of Keynes' and Friedman's monetary theories. The result is a presentation of the fundamental differences of the two monetary theories. Additionally, Keynes' monetary policy prescriptions from The General Theory are discussed to investigate further any possible basis for Friedman's criticisms.