When Keynes rejected Friedman’s paper

Again going back to the PBS sourcepointed earlier on this blog.

Ok now here is a must read interview of Milton Friedman. It talks about Friedman’s views of markets, quantity theory of money, Friedman’s rejection of Keynes theory of great depression, though he had great respect for Keynes the economist, on Nixon, on Ronald Reagan, his role in Pinochet’s Chile etc etc.

First the topic of the post:

INTERVIEWER: On a personal level, what contact did you have with him?

MILTON FRIEDMAN: With Keynes? The only contact I had with him was to submit an article to theEconomic Journal, which he was editor of, which he refused and rejected. I had no  personal contact with him other than that.

INTERVIEWER: What did the rejection say?


MILTON FRIEDMAN: Well, it was an article that was critical of something that A.C. Pigou, a professor in London and at Cambridge, had written. And Keynes wrote back that he had shown my article to Pigou. Pigou did not agree with the criticism, and so he had decided to reject it. The article was subsequently published by the  Quarterly Journal of Economics, and Pigou wrote a rejoinder to it.

🙂 So there was just one piece of talk between the two great great economists!!

And what about the respect for Keynes the economist?

INTERVIEWER: When did you begin to break with Keynes and why? What were the first doubts you had?

MILTON FRIEDMAN: Very shortly after the war, when I came to the University of Chicago and started working on money and its relation to the economic cycle. I cannot tell you exactly when, but very shortly thereafter, as I studied the facts, they seemed to me to contradict what Keynesian theory would call for.

INTERVIEWER: What was it that you studied that made you begin to feel that this didn’t add up?

MILTON FRIEDMAN: Let me emphasize [that] I think Keynes was a great economist. I think his particular theory in The General Theory of Employment, Interest, and Money is a fascinating theory. It’s a right kind of a theory. It’s one which says a lot by using only a little.

So it’s a theory that has great potentiality. And you know, in all of science, progress comes through people proposing hypotheses which are subject to test and rejected and replaced by better hypotheses. And Keynes’s theory, in my opinion, was one of those very productive hypotheses—a very ingenious one, a  very intelligent one. It just turned out to be incompatible with the facts when it was put to the test. So I’m not criticizing Keynes. I am a great admirer of Keynes as an economist, much more than on the political level. On the political level, that’s a different question, but as an economist, he was brilliant and one of the great economists

Fascinating again.

What is particularly interesting is the interview mention of something called Mont Pelerin meeting. The website of the society says:

After World War II, in 1947, when many of the values of Western civilization were imperiled, 36 scholars, mostly economists, with some historians and philosophers, were invited by Professor Friedrich von Hayek to meet at Mont Pelerin, near Montreux, Switzerland, to discuss the state and the possible fate of liberalism (in its classical sense) in thinking and practice.

The group described itself as the Mont Pelerin Society, after the place of the first meeting. It emphasised that it did not intend to create an orthodoxy, to form or align itself with any political party or parties, or to conduct propaganda. Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.

Members who include high government officials, Nobel prize recipients, journalists, economic and financial experts, and legal scholars from all over the world, come regularly together to present the most current analysis of ideas, trends and events.

It so happened that Friedman was member of the first meeting of this MPS. So questions were asked on this:

INTERVIEWER: You were invited to Friedrich Hayek’s first Mont Pelerin meeting in 1947. Why?

MILTON FRIEDMAN: Well, I was invited primarily because of my brother-in-law, Aaron Director. He was an economist teaching [at] the University of Chicago, and when Hayek’s Road to Serfdom was submitted to American publishers, one publisher after another  rejected it. He was finally published by the University of Chicago Press, partly because of Aaron Director’s intervention. He wasn’t at Chicago at the time, he was in Washington, but he knew the director of the press, and he also was very close to Frank Knight, who was a professor at Chicago. And so Aaron had a considerable role in getting The Road to Serfdom published.

Also, he had studied at the London School of Economics and had met Hayek [there] before. One of the people whom Hayek was in touch with when he was exploring the possibilities of having the Mont Pelerin meeting was there. And so Aaron organized a group from the University of Chicago. There was myself, there was George Stigler, there was Frank Knight, and there was Aaron Director.

INTERVIEWER: What kind of people gathered at Mont Pelerin, and what was the point of the meeting?

MILTON FRIEDMAN: The point of the meeting was very clear. It was Hayek’s belief, and the belief of other people who joined him there, that freedom was in serious danger. During the war, every country had relied heavily on government to organize the economy, to shift all production toward armaments and military purposes. And you came out of the war with the widespread belief that the war had demonstrated that central planning would work. It reinforced the lesson that had earlier been driven home, supposedly, by Russia.

The left in particular, or the intellectuals in general in Britain and the United States, in France, wherever, had interpreted Russia as a successful experiment in central planning. And so there were strong movements everywhere. In Britain a socialist [Clement Attlee] had won the election. In France there was indicative planning that was [in] development.

And so everywhere, Hayek and others felt that freedom was very much imperiled, that the world was turning toward planning and that somehow we had to develop an intellectual current that would offset that movement. This was the theme of The Road to Serfdom. Essentially, the Mont Pelerin Society was an attempt to offset The Road to Serfdom, to start a movement, a road to freedom as it were.

Now, who were the people who were there? There were economists, historians, mostly economists and historians, but a few journalists and businessmen, people who, despite the general intellectual current moving towards socialism, had retained the belief in free markets and in political and economic freedom. They were those people whom Hayek  happened to know, or whom he had met, whom he had run into in the course of his travels.

This is really interesting stuff. I was not aware of such a society. Must have been some confluence of thoughts. It must have led to the flow of thought from Keynesian to Friedman/Hayek. When you have such brains together working for a common cause, what else would you expect. Somehow we in economic research do not pay much attention to this flow of economic thought. I mean what were the factors that led to Keynesian thoughts spreading all around the world. or Friedman’s? True they were good economists and had great research, but there are so many others as well. The circumstances lead to the flow or shift of thought. What were they?

Friedman also points that the funding for this MPS came from Swiss:

INTERVIEWER: What was Hayek’s role at these meetings, and what was he like personally? This must have been the first time you met him.

MILTON FRIEDMAN: No, I had met him before that. I had met him in Chicago when he was in the United States lecturing on The Road to Serfdom. Hayek’s role? Number one, he was responsible for the meeting. He organized it. He selected the people who were going to be there. He helped to line up some of the money that was used to finance it, though a considerable part of that came from a Swiss source. That’s why it was held in Switzerland. So far as his role at the meetings was concerned, he gave a talk at the opening session which set out what he had in mind. Along with several other people, he set up the agenda and presided over some of the sessions, participated in the debates, and was a very effective participant from beginning to end.

Very interesting again this Swiss connection.. There were some funny moments as well.

INTERVIEWER: Some of those debates became very, very heated. I think [Ludwig] von Mises once stormed out.

MILTON FRIEDMAN: Oh, yes, he did. Yes, in the middle of a debate on the subject of  distribution of income, in which you had people who you would hardly call socialist or egalitarian—people like Lionel Robbins, like George Stigler, like Frank Knight, like myself—Mises got up and said, “You’re all a bunch of socialists,” and walked right out of the room. (laughs) But Mises was a person of very strong views and rather intolerant about any differences of opinion.

 A must read speech. I can just reproduce every word of the speech on this post.

I covered two pieces from the same source earlier:

More to follow…

2 Responses to “When Keynes rejected Friedman’s paper”

  1. Tweets that mention When Keynes rejected Friedman’s paper « Mostly Economics -- Topsy.com Says:

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  2. How do Nobel Laureates get path breaking ideas? Says:

    […] Wirtschaft Köln in Germany has this interesting paper on the topic. Thanks to this interview of Milton Friedman interview I found Mont Pèlerin Society. I researched a bit and got a few papers.  […]

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