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The EU referendum: what would Keynes and Friedman do?

    John Maynard Keynes and Milton Friedman are arguably the two most significant economic thinkers of the 20th century. Many of their theories still dominate economic teaching at university, particularly their debate on whether increasing government spending increases output by more than a rise in the money supply. It is fair to say that they both would have strong views on the EU referendum, and as they always did, there’s a chance they would come down on contrasting sides.

    Before I begin to try and attribute the various sides Keynes and Friedman would come down on, it must be noted that this is purely my own take on their work – by all means if they were alive they might disagree with where I have placed them in this debate.

    Keynes is infamous for his advocating of state interventionism to mitigate the negative effects of recessions. He wrote far less on ideas such as free trade, which are perhaps more relevant in the EU referendum debate. Nevertheless, it can be seen from some of his writings, that he was sympathetic to the idea of European unity, and more compassionate to other European countries than others during his time. In his book, ‘The Economic Consequences of the Peace’, he heavily criticised the Treaty of Versailles, and was one of the few people to do so. He wrote that ‘the policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable’. Many of Keynes’ followers argued that his predictions turned out to be true once Germany suffered from hyperinflation in 1923, and with the collapsing of the Weimar Republic. Moreover, during the peace negotiations after World War 2, Keynes proposed the creation of common world unit of currency and a world central bank, in order to create incentives for countries to avoid substantial trade deficits or surpluses. These actions would seem to place Keynes heavily in the ‘remain’ camp as it is clear he sought to promote trade wherever possible, and the UK membership of the EU, is as close as feasible in the 21st century to Keynes’ vision of a world unit of currency.  Of course, this is an oversimplification, as it is highly unlikely that in this economic climate, Keynes would still feel a world unit of currency is a sensible policy. Moreover, Keynes most certainly would not have approved of the EU’s protectionist trade policy towards the rest of the world, highlighted by the Common Agriculture Policy (CAP). Having said that, Keynes’ overall preference for economic unity, rather than banging on the drum of British patriotism, as well as the clear promotion of free trade that being in the EU does guarantee (all be it only with other EU countries), does hint at him being a ‘remain’ voter.  

    Friedman was Keynes’ main critic in the 20th century, rejecting his conclusions, and instead suggesting that a steady rise of the money supply was the best way to help stabilise the business cycle. Friedman’s philosophy praised the virtues of the free market, whilst arguing for only very limited government intervention. This is what brought him into direct conflict with Keynes. Like Keynes, however, he was big supporter of free trade and the ‘benefits it brings to the masses’. The EU most certainly promotes free trade inside its borders, and Friedman would be a heavy advocate of the benefits that the single market brings to UK. Moreover, the state aid EU rules prevent the nationalisation of many industries, again a significant positive for Freidman. However, labelling him a supporter of the ‘remain’ campaign because of this is too premature. The EU adds another layer of bureaucracy and regulation, which in Friedman’s eyes, distorts markets in a negative way. The difficulty in pinpointing what Friedman’s view would be on the referendum, is rather neatly matched up in the political spread of MPs on the matter. Labour MPs, likely to be more in favour of Keynesian economics rather than monetarism, are overwhelmingly voting to remain in the EU. By contrast, Conservative MPs, who more likely believe in monetarism, are split almost equally between the two sides. The fact that it is feasible to argue both ways as to Friedman’s position on the debate further adds to the explanations as to why the Conservatives are so split on the issue.

    Keynes once said that if the IMF stuck to its founding principles that ‘the brotherhood of man will have become more than just a phrase.’ His emphasis on global unity throughout his life makes it seem fairly inconceivable that he would vote anything other than remain come June the 23rd. Friedman is virtually impossible to pin to one particular side, and anyone who suggests otherwise, is overlooking much of what he said and wrote. 

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    Comments

    Bill S - About 374 days ago

    To quote Friedman "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. … ".

    Given that the conclusion of the IFS report on Brexit (25th May 2016) states that a Brexit vote will likely require tax rises to deal with the public finance effect. It seems likely that Friedman would have voted to remain.

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