The truth, although nobody on the right will ever admit it, is that Friedman was basically a Keynesian — or, if you like, a Hicksian. His framework was just IS-LM coupled with an assertion that the LM curve was close enough to vertical — and money demand sufficiently stable — that steady growth in the money supply would do the job of economic stabilization. These were empirical propositions, not basic differences in analysis; and if they turn out to be wrong (as they have), monetarism dissolves back into Keynesianism.
It’s worth pointing out, by the way, that this time the Fed did all that Friedman denounced it for not doing in the 1930s. The fact that this wasn’t enough amounts to a refutation of Friedman’s claim that adequate Fed action could have prevented the Depression.All well and good. Krugman is almost certainly right... as far as he goes.
What Krugman doesn't acknowledge is that not only does Friedman's monetarism collapse back into Keynesianism by virtue of the failure of its assumptions (LM curve verticality, stable money demand) to stand up to real world scrutiny, but that the Hicksian IS-LM framework itself is an utterly unrealistic, fundamentally incorrect construct that does not at all properly represent Keynesian macro theory.
Even the creator of IS-LM, JR Hicks himself, repudiated the model as virtual rubbish - over 30 years ago! - calling it nothing more than an interesting plaything useful only for classroom discussion.
Thus the underpinnings of the entire modern neoclassical macro theory (i.e., mainstream macro since Patinkin's post-Keynesian synthesis) -- which includes not only the Freshwater versions such as Friedman's or Mankiw's, but also the Saltwater varieties of Krugman, DeLong & Summers -- are banished to the dustbin of history.
Or, at least, they should be.
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