Friedman on the Quantity Theory and Keynesian Economics

Abstract

The article is based on textual evidence from the quantity-theory and Keynesian literature. It shows, first, that the conceptual framework of a portfolio demand for money that Friedman denotes as the "quantity theory" is actually that of Keynesian economics. Conversely, Friedman detracts from the true quantity theory by stating that its formal short-run analysis assumes real output constant, while only prices change. Friedman also incorrectly characterizes Keynesian economics in terms of absolute price rigidity. He does this by overlooking the systematic analysis by Keynes and the Keynesians of the role of downward wage flexibility during unemployment, and of the "inflationary gap" during full employment. Otherwise Friedman's interpretation of Keynes is the standard textbook one of an economy in a "liquiditytrap" unemployment equilibrium. The author restates his alternative interpretation of Keynesian economics in terms of unemployment disequilibrium.