Business Cycle

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Friedman and Samuelson on
the Business Cycle
J. Daniel Hammond
Chicago School economists have come in for criticism since the financial crisis and so-called Great Recession began in 2007. Commentators have blamed recent problems on a laissez-faire faith in the efficacy of markets and simple rules for business-cycle policy— ideas associated with economics as taught and practiced at the University of Chicago. Events over the past four years, we are told, demonstrate the need for a restoration of Keynesian thinking about business cycles and activist government policies to keep markets from failing. However, there is another aspect of Chicago School economics that is commonly overlooked. This is the conviction that economists’ understanding of the business cycle is meager in light of the knowledge necessary for activist countercyclical policy to be effective. From this comes the Chicago School concern that economists and policymakers not attempt to do something beyond their capability. Overreaching can make the problems worse.

In the public mind, Milton Friedman and Paul Samuelson represent more than any other individuals two competing schools of thought that dominated macroeconomic and business cycle debates over much of the past century. As readers of their Newsweek columns Cato Journal, Vol. 31, No. 3 (Fall 2011). Copyright © Cato Institute. All rights reserved.

J. Daniel Hammond is Hultquist Family Professor in the Department of Economics at Wake Forest University. Prior versions of this article were presented at conferences sponsored by the BB&T Center for the Study of Capitalism at Wake Forest University and the History of Economics Society, and at the Duke University History of Political Economy (HOPE) lunch seminar. For comments the author thanks Roger Backhouse, John Dalton, Art Diamond, Claire Hammond, Robert L. Hetzel, Kevin D. Hoover, Sandeep Mazumder, Mary Morgan, John H. Wood, and two Cato Journal referees.

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from the late 1960s into the 1980s learned, Friedman was the “conservative” Chicago economist favoring free markets, deregulation, and rules-based monetary policy. Samuelson was the “middle-of-theroad” economist, favoring regulatory oversight of markets and activist monetary and fiscal policy. Friedman was the monetarist and

Samuelson the Keynesian. Friedman died in 2006, so we do not have his commentary on the current crisis. Samuelson died in 2009, and before his death spoke with journalist Nathan Gardels of his and Friedman’s respective ideas and influence in light of the crisis. Nathan Gardels: You have outlived Milton Friedman, who

died in 2006. And now your Keynesian ideas have also outlived his radical free-market ideology. Is economics back to where you started?
Paul Samuelson: You are right. I am old enough to have seen
the cycle come full circle. My experience is more valuable
now than it was even a year ago, since I first became actively engaged in economic policy on January 2, 1932, at the rock
bottom of the Great Depression, when I was an adviser to the Federal Reserve Bank in Washington. In subsequent years, I
was principal economic adviser to President-elect John F.
Kennedy in 1960 and recruited the team for his Council of
Economic Advisers.
I became a centrist early on. Of course, the central planning system of the socialist states we still contested with ideologically in those days was idiotic, but that didn’t mean government doesn’t play a critical role.

And today we see how utterly mistaken was the Milton
Friedman notion that a market system can regulate itself
[Samuelson 2011].

As Americans struggle in the current climate with what to believe about economic conditions and policy, it is instructive to look back at the ideas on business cycles and macroeconomic policy of these two giants of 20th century economics.

Friedman: NBER Economist
The question of how much economists know about the business
cycle, and thus how much expertise they can...
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