Keynes and Friedman on Laissez-Faire and Planning; Where to draw the line - Sylvie Rivot - 2013

4 Introduction great compromise between freedom and efficiency rather than on the relevant compromise to be made (and in particular on the proper way to stabilise the economy) that they are poles apart.

Likewise, the specific logics that underlie their respective pleas can also provide the fundamental rationales of their advocacies regarding the way fiscal and monetary policies should be conducted. We will see that the contemporary perspective, which formulates the debate in terms of rules versus discretion, appears much too narrow to encompass the whole of the stakes of the debate between our two authors. On the one hand, what one now calls rules is much too discretionary to fit into a Friedmanian policy advice setting. On the other, what we now call discretion is merely alien to Keynes’ overall policy principles. Keynes too advocates ‘policy guidelines’ although he parts company with Friedman about the ultimate goal of the rules and differs in the dose of leeway to be given to the authorities. Yet, we hasten to add that discretion is highly needed for Keynes when the system endures unforeseeable shocks despite the stabilising effect of the rules implemented. However, the fact remains that Keynes is quite alien to fine-­tuning and to deficit spending.

Ultimately, with the help of Keynes and Friedman we should be able to rethink the critical issue of crises, which is at the centre of the debates today.

Indeed, for both of them the basic tenets of the economic policy they call for are strongly embedded in their interpretation of the 1929 crisis and the way the latter turned into the Great Depression. Keynes and Friedman were both struck by the Great Depression. It is usually considered that the 1929 crisis and the way it turned into the most severe recession of the twentieth century fixed the whole of their respective intellectual background – as a contemporary for Keynes and much more as a historian for Friedman. As during the time of the Great Depression, one can now find again at the core of debates issues such as the self-­ regulating forces that a decentralised market system might possess (or not), the ability of financial markets to coordinate the inter-­temporal plans of investors and savers, but also and strikingly the role played by public authorities in the sudden occurrence of economic crises.

First, what are the critical elements at the origin of the crisis? In particular, is it possible for State authorities and in particular for monetary authorities, to have created the crisis through misguided policies, as Friedman claims regarding the 1929 episode and as Taylor argues today in his Getting off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis (2009)? Or are the very causes of the current recession to be found in the financial side as well as in the real side of the economy, through financial markets’ malfunctions and global imbalances, as Keynesians would argue?

On this basis, coming back to the policy devices Keynes and Friedman originally advocate should help us to reframe the terms of the debate surrounding the economic policy to be followed to escape the recession. What should be State priorities: the then-­and-now diseases of a severely out of equilibrium economy?

Or in a more long-­run perspective the restoration of the self-­stabilising forces that the system inherently possesses, having as its corollary a close attention paid