Is Milton Friedman a Keynesian?: An Analysis of the Chicago School

0:00It turns out there's been a very interesting title for me as Milton Friedman Akainzian. I've been asked questions by people at Auburn and even on the plane on the way up here. Last night at the hotel people were asking me, well what's the answer? Is he Akainzian or isn't he? And it sort of reminded me that a couple of years ago at Auburn when our geography department was looking for a new faculty member and had a prospect in for an interview, And the other faculty members, knowing the reputation of education these days, thought they'd better quiz him on some basics. And they said, well, just for the record, they ask, which way does the Mississippi River run?

0:45And he said, well, I can teach it either way. I respond to this question as Milton Friedman, a Keynesian, in a very similar way, but today, before this group, I get to teach it the way I like to, and argue that in an important sense, yes, he is a Keynesian. And I have to confess that when I first had this title suggested to me, it wasn't my title originally. I didn't like it. And I didn't think I could write a paper that would live up to it. And in fact, what I did was invent another title that you might have seen circulating in different reports of this conference.

1:30It was really a milquetoast title, income expenditure analysis in the Chicago tradition. Well, now I don't like that title. I want to go back to Milton Friedman, a Keynesian. It's a more fun title. Most of us remember the quote, we're all Keynesians now, associated with Richard Nixon, who spoke those words not long after he took office in 1969. And yet, we understand what he meant by them was something quite different than Friedman might have meant when he said the same thing several years earlier. With Nixon having just taken office, he was simply recognizing that he had before him several levers to pull to try to influence the economy.

2:16He had one marked money supply and one marked government spending and one marked tax policy and advisers telling him which ones to pull which direction in order to make the economy go and get through the next election. and so if he wasn't a Keynesian he wasn't anything he could either pull the levers he had in front of him or do nothing and of course no president can resist for long pulling the levers Milton Friedman though uttered that same statement in an interview to Time magazine in the early 60s and it was quoted by Time as Milton Friedman colon quote we're all Keynesians now period close quote Friedman, very irritated with Time magazine for having taken his quote out of context as he explained in the introductory chapter to Dollars and Deficits, a book published in 1968, and Friedman explained what the context was.

3:18He had said, made two statements. He says, in one sense, we're not Keynesians, we're none of us Keynesians, and by we he was referring to, of course, the monitors, and by that he meant, and we don't agree with the initial conclusions drawn by Maynard Keynes, but then he said, in another sense, we're all Keynesians now, and he went on to explain that the sense in which we are all Keynesians now is that we all use the Keynesian language, to Keynesian Analytical Apparatus to do our research. And from an Austrian point of view, we can demonstrate that it's that latter sense that counts. Okay, so what I want to be arguing is the fact that he has adopted the analytical framework set out by Keynes as exposited by some of his interpreters is more significant than the particular differences that Keynes and later Friedman came to using that analytical framework.

4:19Let me start the story, though, by going back to the beginning with Keynes's first book on these issues, The Treatise on Money, which was published in 1930. And that book doesn't look particularly Keynesian today in the modern sense of that term. But what we find in the book is that Keynes argued in terms of aggregates. where he argued in terms of total savings, total investment, total output as measured by total income and he showed how those things play off against one another in order to give us some equilibrium values for each of them. The book, as Dr. Schausen mentioned earlier, was criticized by Hayek.

5:10In the journals, in fact, the critique was so long it had to be broken up and printed in two different, two separate issues of the journal. And in that critique, Hayek found many dissatisfactions, many ambiguities and inconsistencies in Keynes's theory, but his fundamental criticism was at the level of aggregation that had been and adopted by Keynes for the purposes of analysis. And Hayek wrote that Mr. Keynes' aggregates conceal the most fundamental mechanisms of change. That was the bottom line critique in that argument. What I want to show is that that same critique applies to the later Keynesian theory.

5:55It also applies to interpretations of the general theory, what's called ISLM analysis, and that it implies or that it applies to monetarism as exposited by Friedman because he uses that very ISLM analysis that comes from the general theory. Now, I might start by noting that there were a lot of changes in Keynes's view between the treatise on money and the general theory that was published half dozen years later. later. But none of those changes were responsive to the criticisms of von Hayek. He still maintained the same aggregates. In fact, if I wanted to list the most important changes, I've listed three here. And that is that the general theory, unlike the treatise on money, gave attention to the issue of uncertainty that enshrouds the future. In fact, if you read certain chapters of the General Theory, Chapter 12 on Long-Term Expectations, you get the idea that the uncertainty is just completely debilitating, that the market can't cope with the uncertainty that it must face.

7:04If you read Keynes' 1937 article in which he attempted to explain what he meant by the general theory, you learn that it was uncertainty that dominates the business world and that's a problem to be coped with. So the introduction of uncertainty characterizes the general theory where it didn't so much the treatise. A second major change was his theory of interest that hadn't been all that conventional in 1930 but certainly much more so when compared to his theory of interest in 1936. According to Keynes in his 36th General Theory, the interest rate was determined wholly by psychological factors, a claim that he amended fairly quickly to say they were determined by conventional factors.

8:00The interest rate comes to be what it is because of dynamics of the interest rate itself. There is a famous critique of Keynes in this respect by Dennis Robertson, another author who writes in a style similarly opaque to Keynes or to Bill Hutt. Robertson and others at that time were fans of Lewis Carroll through a looking glass in all the books. He criticized I asked Keynes on this issue of interest, and quoting Robertson, he said, According to Keynes, the interest rate is what it is because it's expected to become other than what it is.

8:47If it weren't expected to become other than what it is, there's nothing to tell us why it is what it is. The organ that secretes it has been amputated and somehow it still exists, the grin without the cat, and that's the part where it's from Lewis Carroll. The very insightful view of Keynes on the theory of interest and something that was introduced anew, I think, in the general theory. The third difference going from the treatise to the general theory, equally important, is that in the general, or in the treatise on money, markets worked, At least that was the underlying presumption that the interest rates and prices would adjust. Not instantaneously maybe, but they would adjust. In the general theory, that didn't happen.

9:33Any change in market conditions were accommodated not by price changes and interest changes or wage rate changes, but rather changes in income, levels of output. You didn't get adjustments in terms of prices, you got adjustments in terms of quantities. And that's what gave rise to the oxymoron, as Dr. Skousen called it, of unemployment equilibrium. The economy can settle down into an equilibrium that involves heavy doses of unemployment. Now, when we move beyond the general theory, we have to be careful in what sort of interpretation of Keynes we choose to go with. Interpreting Keynes is still a growth industry, it turns out, this many years after the publication of the General Theory.

10:23Books are coming out each year, review articles in the major journals. You'd be surprised to look through and see how many of them deal with books, new interpretations of Maynard Keynes. And this is possible because of the scope for selective reading of what Keynes actually wrote in the General Theory. And some of you have gotten the flavor of that by a few choice quotes already in this conference. And it's even been expanded by what I call creative reading of what Keynes might have written, okay, what he probably had in mind and what surely he meant, so industry has expanded by this route.

11:10But I want to boil it down to two different interpretations of Keynes, one of which hinges very critically upon the uncertainty that prevails in the marketplace and the other that, well, cuts through that uncertainty to see what Keynes actually said about relationships among these macroeconomic magnitudes. And some of you familiar with reading Keynes and reading Keynesian and Interpretations. We'll see questions asked like this, does the interest in elasticity of the demand for credit, demand for investment funds figure importantly in Keynes' theory or does the pervasive uncertainty, does the demand for credit itself driven as it is by by the Animal Spirits, a term Keynes used three times in two pages.

12:03Swamp any considerations of elasticity? In other words, if you're doing this as a blackboard exercise, do you look which way the curve slopes or do you theorize on the basis that the curve doesn't stay put? Keynes would say, never mind how big the slope is, it whips around too much to figure that out anyway. Similar question, does the elasticity, extreme elasticity, of the demand for money, with respect to the interest rate figure, importantly, in Keynes's theory, that's the liquidity trap, there's so much is written about, or does the basic instability of that demand for money, based as it is on the fetish of liquidity, another term used by Keynes, swamp any considerations of elasticity. In other words, do we want to look at how all these curves are shaped or do we want to theorize on the basis of the way in which they flail around in unexpected directions?

13:06Now some economists and notably also GLS Shackle, George Shackle, Ludwig Lockmann, who has written some very Austrian works in his early career, and Career, Capital and its Structure, 1956 and so on. When he turns to interpreting Keynes and to expositing his own ideas about how economies worked on the basis of Keynes, he tends to take this view that's based heavily on animal spirits and the fetish of liquidity. Great emphasis on the part of Shacklin-Lockman too. Animal spirits as they affect the bullishness or bearishness of people in the stock exchange, Significance to the Fetish of Liquidity as it affects people's willingness to commit themselves to either side of the market just by the nature of the terms when we're talking about spirits and fetish behavior, it's erratic, it's unpredictable, it's rooted in psychology and not in economics.

14:10This causes them to draw the analogy between the economy as it performs in accordance with the Keynesian vision and the operation of a kaleidoscope. Some of you have heard the term the Keynesian kaleidics or the kaleidic society by which is meant that the time pattern of prices and wages and interest rates in the economy It is no more predictable than the changing patterns of cut glass in a kaleidoscope. And this is the basis for, well, one book, Keynesian Kaleidics, written by George Shackel, and it's a popular interpretation of Keynes. I would argue here that it doesn't so much represent an understanding of the economy as taught to us by Keynes, as it represents the denial of any possibility of understanding in the Economy.

15:04You might as well peer through your kaleidoscope and be done with it. Now if this is the interpretation of Keynes that we were to accept, then I would have to argue that Friedman is not a Keynesian and I don't want to make any case that Friedman shares any of these views that we rightly associate with Shackle and more recently with Ludwig Lachmann. Here is a more conventional and I think more accurate interpretation of Keynes and it's simply one that cuts through this uncertainty that clouds all of the decisions and the general theory and looks at the relationships that actually do exist according to Keynes. This is the interpretation that you would associate with John Hicks who wrote early on, 1937, Mr. Keynes and the Classics, A Suggested Interpretation.

16:01Credit for this particular view also goes to James Mead and Roy Herod. This is one of the modern questions that's still in debate, who really deserves credit or blame, which are willing to look at it, for the ISLM apparatus. And there's evidence, I think, that, in fact, my reading of the general theory suggests that Hicks' interpretation is close to the mark, an interpretation developed by Alvin Hansen in this country and popularized by him. Well, what does this interpretation amount to? Hicks identified a number of relationships in the economy between consumer behavior, investment behavior and the constraints that any economy faces.

16:52And it goes something like this, that in the simplest elementary form of Keynesianism, somehow or other investment and savings have to come into equality with one another. Some mechanism is at work, whether it's prices or wages or changes in income that will cause savings to be equal to the amount of investment. Also, somehow or other, the supply of money and the demand for money must come in line with one another. in Equilibrium, however conceived, all money supplied gets held out there by someone. And in fact, it's from these two equilibrium conditions that the name ISLM derives. In other words, IS is the equality of investment and savings, LM is the equality of the demand for money, L, that's liquidity, and the supply of money, which is just represented as M, so that's ISLM analysis.

17:48The particular way in which they come into equality is based on consumer behavior of one sort or another, very broad-based aggregated consumer behavior. The aggregate level of income, total income, independent of whether that income is earned by wages or profits or interests or rents. In fact, the division of that income among the various factors plays no role whatsoever in this basic construction of Keynes's, the interpretation of Keynes, and more significantly for the purposes today, Keynes dealt in terms of aggregate investment, never mind the direction of investment, never mind what particular investment activities are undertaken, just sum it all up as aggregate investment, it has to be brought into equality with aggregate savings.

18:43And for money was dependent in Kane's view on both interest rate and income which had to come into line somehow with the supply of money. Now, these behavioral relationships in conjunction with the equilibrium constraints that I have mentioned gives you determinate values of all of the parameters in the system, interest rate, income, aggregate investment, aggregate savings and so forth. In fact, in modern times, this income expenditure analysis, as it's called, ISLM analysis, it's called aggregate or income expenditure analysis, is sometimes thought of simply as macroeconomics. Okay, that is macroeconomics. It came from Keynes, and that's what we mean when we say macroeconomics, and that within that framework, that macroeconomic framework, we can identify positions taken by Keynes In fairness to Friedman, what I would like to do is argue for a moment about the macroeconomics In the context of Keynes and of Friedman within that Keynesian framework, and this is the context in which we can say Keynes and Friedman are very different.

20:16They came down on opposite sides of a lot of issues. Once I do that, then I'll try to show you that nonetheless, Friedman's adopting of this framework makes him much more like Keynesians from an Austrian point of view and swamps the differences. Okay, first the differences and I've listed five differences between I think five significant differences between Keynes and Friedman. The first is that Keynes really believed that the interest rate was a monetary phenomenon. He really believed that it reflected nothing real in the economy. That it simply depended upon and psychology of the business community or convention, he would say it both ways on the one hand, and the supply of money on the other.

21:06It was the role of the central bank then to get a handle on that psychology and print enough money to keep the interest rate sufficiently low level. Keynes actually argued in the general theory, and this gets overlooked in the textbook, that the interest rate can be and should be driven to zero and kept there where it belongs. And he thought a generation or two would probably be enough to do the trick. This is an aspect of Keynes that textbooks haven't picked up on. They have saved Keynes from himself to some degree. Milton Friedman, on the other hand, believes that the interest rate is a real phenomenon. Friedman is much closer to the Austrians in this connection.

21:54Depends on the supply and demand of loanable funds. For a second difference between the two, Keynes had in mind an extremely narrow channel of influence between monetary policy, which impacts, in the first instance, on interest rates, and the ultimate income, changes in income that that policy results in. In other words, if you can increase the money supply, this drives down the rate of interest, this stimulates investment, this causes more people to be employed, and that raises incomes, okay? So it's a very narrow channel of operation. Almost any kind of change that Keynes dealt with, it always went through the interest rate somehow, okay?

22:44Nothing affected anything except through the interest rate. Again, Dennis Robertson was an effective critic of the times. And Robertson argued that according to Keynes, the moon affects the tides, but only as it works through the rate of interest. Friedman, on the other hand, has a very broad concept of how increasing the money supply affects the economy. And again, an effect that's probably more consistent with the Austrian view than the Keynesian view that newly created money gets spent in all sorts of different ways. It gets spent on consumption goods as well as investment goods, on real investment as well as financial securities, on old investment goods as well as new.

23:32And money in a very pervasive way drives up nominal incomes in the economy. But of course that effect is totally spent in the raising of prices rather than a real output. A third distinction has to do with long-run expectations. This is Keynes' chapter 12. And according to Keynes here, that long-run expectations are essentially baseless. That the business community has some expectation about what profits can be made on investments might be started in the current period but those expectations may be brought into consistency with one another across the economy but there's no basis for them collectively it's based on nothing more substantial than well optimism psychological factors of one sort or another and prosperity then is is based Based on the optimism, depression based on pessimism.

24:35And yet, pessimism can change to optimism without there being any particular explanation for it. In fact, the common explanation is somebody bumped the kaleidoscope, okay, and you've got a different array of prices based on a different constellation of expectations. Friedman, of course, would disagree. Expectations reflect, by and large, for the most part, in the long run, the underlying The realities, the people's preferences, the technologies, the resource availabilities. So still another way that Friedman and Keynes are opposites. A fourth way in which they differ, and this is one that Friedman himself emphasizes considerably, is the issue of what causes economic downturns, how do we get into this business of a bust, What Causes the Economy to Collapse?

25:29Keynes argued that it was, he called it a collapse in the MEC, the Martial Efficiency of Capital, by which he meant a sudden decrease in the demand for investment funds, right? What caused that? Well, business optimism had turned to business pessimism, and the collapse ensued. So in other words, it gets rooted in psychology as it works through the demand for investment Funds. Friedman's study suggests that this isn't the case. He rejects on empirical grounds that notion and argues instead that the downturn is attributable to monetary factors and more specifically the inept behavior on the part of the central bank. The central bank for one reason or another, ineptness is the one he typically mentions, contracts the money Money Supply and this sends the economy into a tailspin.

26:25And here's the difference that even at this point we see a similarity between Keynes and Friedman as compared to the Austrians. Neither Keynes nor Friedman thinks that that downturn is having any relation to the previous boom. Okay. The downturn gets caused at the peak by some factor that intervenes. loss of confidence as far as Keynes is concerned, NF monetary policy as far as Friedman is concerned. And lastly, I'll mention that Keynes believed, and here you have to pick your chapter and make up your own mind on what he really believed, that prices and wages won't adjust to the new market conditions.

27:12If they did, if they adjusted to the new market conditions, you simply wouldn't get all of the unemployment that you otherwise would get. But here I have to warn you that Keynes has several different arguments that aren't consistent with one another. Keynes is arguing like a lawyer on this issue. You probably know about the case of the broken urn where the lawyer will argue, my client didn't borrow your urn. It was broken when you lent it to him and it was in perfectly good shape when he returned it. Keynes' argument about wages is very similar to this. Keynes argued that lamentably wages don't fall.

28:03And then later on he argued that they do fall, but they don't fall fast enough. And then when he saw evidence that they fell pretty fast, he said they shouldn't be allowed The way I like to say it, Keynes didn't believe that the market could adjust to existing supply and demand conditions, so the alternative was that through government policy, market conditions, supply and demand conditions, would be adjusted to whatever prices and wages happened to be. Here we get a contrast with Friedman who does believe, along with the Austrians, that the markets will adjust. Wages will fall if there's unemployment, prices will fall if there's a glut of commodities.

28:52They might not fall instantaneously or immediately to the exact correct level but that's irrelevant. I prefer, in any case, prices adjusting to market conditions rather than a market being adjusted by policy to price conditions. Now, after giving what I think is fair treatment to Friedman and showing you the differences that I think probably he himself would point to, to distinguish himself from Haynesians, But I'll argue that he's more like them than different from them when viewed from the Austrian School. I would argue more precisely that Hayek's criticism applied to the treatise on money, also applies to the general theory, also applies to the ISLM interpretation of it, and therefore applies to Friedman.

29:50According to the Keynesians, a fall in the interest rate will increase the level of investment, but very little. According to the monitors, the fall in the interest rate will increase the level of investment substantially. Now, I suspect that those two views could be reconciled by the fact that the Keynesians are looking at a short run and the monitors are looking at a long run, and that both can be criticized from an Austrian point of view by showing what they left out. Neither theory, Keynesianism or monetarism, deals with the effects of a change in the interest rate within the investment sector. They don't deal with how a lower interest rate affects the allocation of investment goods among different goods in the investment sector.

30:40There's no structure of production in either the Keynesian or the monetarist framework. According to the Austrians, a fall in the interest rate will cause the entire time structure of production to be restructured. It will encourage more time-consuming production process at the expense of less time-consuming ones, favor more roundabout ways of production, as it sometimes said. It will favor the use of durable capital goods and the production of durable consumption goods over those that are less durable. And, in summary terms, it will simply give the entire economy's structure of production more of a future orientation, sacrificing the output now for output at some future time.

31:30The ultimate consequence of this restructuring, as the interest rate changes, depends very critically on the basis for the change in the interest rate. What caused the interest rate to change in the first place? If the interest rate changed, if it fell, for instance, because of the change in people's time preferences, in other words, if people became more future-oriented, if they chose to save more now, relative to what they had been saving, then these effects would be very healthy effects. In fact, it's just this sort of restructuring, coupled with technological advance, that gives us economic growth. People save now, build up the capital stock and are able to enjoy more consumption in future years.

32:16If, on the other hand, the fall in the interest rate was attributable, well, not to any change in preferences, but rather to bank policy, the central bank flooding credit markets with new money, driving down interest rates in that way, Then similar restructuring will take place. It will be in the individual interests of the investors concerned to take advantage of that low rate of interest. But the ultimate outcome will be very different. If the savings isn't genuine, then the boom is artificial. Resource constraints will assert themselves before the investment projects are finished and the economy will experience a downturn. In other words, in the Austrian view, by looking at what is going on within the investment sector, something that neither Keynes nor Friedman do, are we able to see that the artificial boom contains the seeds of its own undoing.

33:16That if the boom is not genuine, if it's triggered by the central bank, it will end in a bust. This is something, as I say, that's not in the other theories. Something spelled out in historical terms in Rothbard's Great Depression and Lionel Robbins' book on the Great Depression. Now, if we look specifically in Keynes and in Friedman to discover what they do say about this possibility, we see different reasoning but it comes to the same conclusion. Keynes rejects the Austrian theory on theoretical grounds, Friedman on empirical grounds. So let's take one at a time and see what's going on.

34:04With Keynes it's not difficult to understand how he reaches his conclusion. The interest rate in the Keynesian system is nothing but psychology and money supply to start with. If the central bank can lower the rate of interest through monetary policy and give us full employment, then there's no basis, according to Keynes, to call that interest rate artificial. There's no other interest rate that it can be compared to, to arrive at that conclusion. So the interest rate simply depends on psychology and the money supply, not on any other real factors that the Austrians believe to underlie the rate of interest. Friedman, or Keynes then, instead of talking about an artificial boom based on an interest rate that was too low, he would argue that the distinction between the actual rate and the so-called natural rate is itself an artificial distinction.

35:02And so he rejected the distinction and didn't see the problems that the Austrians were groping with. If we turn to Friedman now, we find that Friedman rejects the Austrian view on empirical grounds. And here, I can make use of an article that Friedman wrote years ago that preceded even his monetary history of the US. An article that I didn't pay much attention to until recently. There was some correspondence that turned out between Walter Block at the Frasier Institute and Milton Friedman now at the Hoover Institute, where Block is challenging Friedman to explain what's wrong with the Austrian business cycle theory.

35:49Friedman wrote back and indicated that he had already done that in the literature and he wasn't going to bother with it any further. He had dealt with Mises and the Messessians and they hadn't responded to him and that was the end of it. Well, Block wrote back, you know, Block, a very persistent person, wrote back, asked, where in the literature did you refer to Mises in the theory of the business cycle? Friedman indicated while on further reflection he'd misrepresented his earlier position that he hadn't actually referred to the Messessians, But in his chapter 12 of Optimum Quantity of Money and Other Essays, this was the chapter written, I think, in the early 60s, he had dealt summarily with the whole idea that artificial booms can give rise to busts.

36:44And the Austrians had not recognized this as a critique of their own position, had not responded to it. Well, I turned into this otherwise dated piece, but one that has been endorsed as lately as just last year, by Friedman, to see what his case was. Essentially, it's based on empirical results in which his level of aggregation is even higher than the level of aggregation in the ISLM analysis. Instead of looking at movements in consumption spending and investment spending, he simply looks at movements in income. And he looks at the time series of income and sees what happens to it over time and makes his deductions about the nature of business cycles on that basis.

37:35To relate his ideas, he introduces what he calls a plucking model. I think this is a misnomer or at least a bad name. I'm not sure. Let's see what his plucking model is all about. But what he does, he says, imagine, if you will, imagine an inclined plane, sloped plane, and on the underside of the plane, we will glue a string. Now, I hope you don't misinterpret it the way I did. When I heard about this plucking model on the string, I thought it was going to be a violin string that would vibrate or something. That's not it. It's just a regular old string that is glued to the bottom of this incline plane.

38:20Now, the incline represents secular growth in the economy that is at least a potential if the economy is working in a healthy manner. The string, if it were glued at every point along the incline plane, would of course represent the same thing. represent an economy whose income over time reflected no cyclical problems whatsoever. Now unfortunately the economy doesn't perform that well and a better representation of the economy could be gained by reaching up and getting the string at random points and plucking it down. Okay now again this is not an elastic string so it doesn't pluck back up when you let loose you just pluck it Now, if you look at the shape of the string, that's what represents the typical time pattern of income in our economy.

39:14Secular growth and it slumps, builds back up to the potential, goes against, slumps again somewhere. At this point, he didn't find it necessary at all to deal with the Austrian arguments with the Misesian or Hayekian arguments that claimed that a boom would contain the seeds of a bust. He said there's no relationship to the boom and the succeeding bust. In fact, he says the only relationship that you can see exists is the bust followed by by the Boon. So if you want to talk about a cycle, it's not a boom-bust cycle, it's a bust-boom cycle. The Austrians are asking the wrong questions. So this is the challenge that he made.

40:04Now, he recognized, if you see what's wrong with this analogy, and many of you probably already do, but if you recognize what he's doing, he gets his results in a very trivial way. way in other words the potential output of the economy puts some strict upper bounds on how much can be produced so you don't expect to see the economy rising way up above its potential and then falling back down but of course there are no such lower limits on what it can produce it can fall beneath its potential and then rise back up okay so he said there's a strong relationship but for that secular trend there would be virtual one relationship between Bust and Boom, but no relationship between Boom and Bust, okay.

40:56Now, significantly, the way he sets up the thing, the string gets plucked down by some extra market force, and of course that's the Federal Reserve policy that does its deed on occasion when they fall out particularly badly. Friedman doesn't even look to see what's going on in the successive boom. And I think in order to show where the Austrian view fits into this Friedman plucking model, continue to call that, is simply that following Hayek, we would disaggregate, we would apply Hayek's criticism to Friedman's model, Dr. Friedman's string conceals the most fundamental Mechanisms of Change, okay, disaggregate, look, investigate the makeup of this string, the cross section of the string, look at the structure of production as the economy proceeds along a growth path, how are investment goods allocated between long term projects and short term projects, examine the glue that holds it to the plank, in other words, the interest The Austrian would conclude that if the interest rate is a distorted rate, artificially low

42:21because of bank policy, then the string is going to come unglued. And that's the Austrian demonstration that the boom, even though it doesn't show up in terms of the aggregates, aggregate income and maybe not even aggregate investment, will will nonetheless show up if investment within that sector is misallocated. Well, let me conclude then by relating the Austrians and the monetaries and Keynesians to even a broader tradition begun even before Mises introduced the Austrian theory of the trade cycle. We go back to the tradition initiated by the Swedish economist, Newt Wichsel.

43:06He's the one, after all, that Mises borrowed this idea from about the market rate of interest deviating from the natural rate. Much of macroeconomics, in fact I would argue the interesting aspects of macroeconomics, are what's come to be called variations on a Wichselian theme. In other words, what are the possible consequences of a market rate of interest that doesn't reflect true underlying scarcities, a market rate that deviates from the natural rate. The Austrian theory is one particularly interesting variation on a Bixellian theme because it investigates the allocation of goods within the structure of production and uses capital theory and some very insightful ways to do that.

43:51But if we look at Keynes and Friedman, well, they're different, but still, the results that they get are the same. Keynes doesn't worry about a deviation between the two rates because he doesn't think there are two rates. He thinks there's one rate, and that's the rate of interest as determined by money supply in conjunction with the psychological factors. But neither does Friedman worry about a deviation. He thinks there's a natural rate, but he doesn't think there's any deviation, okay? The rate of interest is determined in the marketplace and that there's no systematic deviations from that that might be brought about by a monetary policy. So I conclude by saying that from an Austrian perspective, in spite of the several differences between the Keynesians and the Friedman theories, that Keynes, nonetheless, Friedman, nonetheless, is a Keynesian.