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Milton Friedman on Keynes and the economics profession

I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.

Context. From an August 1998 interview in Barron’s, reprinted in the Hoover Digest as “Mr. Market.” Asked about the Austrian theory of the business cycle (Hayek, Ludwig von Mises and Murray Rothbard), which holds that recessions follow a boom of bad investment and must be allowed to run their course. He goes on to say that the Keynesians also did harm, by producing the stagflation of the 1970s.

Mr. Market
Interview, 1998, Interview in Barron’s, August 24, 1998 (the questioner is identified only as Epstein); reprinted in Hoover Digest 1999 No. 1
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Milton Friedman, “Mr. Market” (Interview in Barron’s, August 24, 1998 (the questioner is identified only as Epstein); reprinted in Hoover Digest 1999 No. 1, 1998). https://miltonfriedman.org/quotes/austrian-business-cycle-theory-done-harm-1998

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He also said

  1. Just as banks all around the country were closing, the Fed raised the discount rate; that's the rate they charge for loans to banks. Bank failures consequently increased spectacularly. We might have had an economic downturn in the thirties anyway, but in the absence of the Federal Reserve System—with its enormous power to make a bad situation worse—it wouldn't have been on anything like the scale we experienced.
    Interview with Milton Friedman
    Interview, 1973, Playboy, February 1973; reprinted in There’s No Such Thing as a Free Lunch (Open Court, 1975), p. 5
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  2. Why is it that on one side of an arbitrary line there was East Germany and on the other side there was West Germany with such a different level of prosperity? It was because West Germany had a system of largely free, private markets—a free lunch. The same free lunch explains the difference between Hong Kong and mainland China, and the prosperity of the United States and Great Britain. These free lunches have been the product of a set of invisible institutions that, as F. A. Hayek emphasized, are a product of human action but not of human intention.

    Context. From a talk at the banquet celebrating the opening of the Cato Institute’s new building in 1993. Turning around the saying “There’s no such thing as a free lunch,” long associated with him, he has just said that there is an extraordinary free lunch: free markets and private property.

    The Real Free Lunch: Markets and Private Property
    Speech, 1993, Remarks at the banquet celebrating the opening of the Cato Institute’s new building, Washington, May 6, 1993 (Cato Policy Report, July/August 1993); reprinted in Toward Liberty: The Idea That Is Changing the World, ed. David Boaz (Cato Institute, 2002), p. 54
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  3. Another occasion in U.S. history which strikingly illustrates this point is our experience from 1929 to 1933. Without doubt, the most serious mistake in the history of the Reserve System was its mismanagement of monetary matters during those years.

    Context. From his essay on how a free society should control money, which weighs a commodity standard, an independent central bank, and legislated rules. He enclosed it with his 1968 statement to the House subcommittee, which reprinted it.

    Should There Be an Independent Monetary Authority?
    Journal article, 1962, In Search of a Monetary Constitution, ed. Leland B. Yeager (Harvard University Press, 1962) (the reprint’s heading gives no page range for the original and it remains unverified); reprinted in the Compendium on Monetary Policy Guidelines and Federal Reserve Structure, Subcommittee on Domestic Finance, House Committee on Banking and Currency, December 1968, pp. 205 to 214., p. 211 of the 1968 House reprint
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