DUELING PRESIDENTIAL ADDRESSES: THE KEYNESIAN RESPONSE TO MILTON FRIEDMAN’S «THE ROLE OF MONETARY POLICY

Milton Friedman’s December 1967 aea presidential address (aer, March 1968), making the case for rules rather than discretion, was considered by James Tobin and others as the most influential aea presidential address ever given, particularly its brief passage on what Friedman termed the natural rate of unemployment, a passage that came to be read as propounding a vertical long-run expectation-adjusted Phillips curve trade-off between inflation and unemployment. Two other future Nobel laureates devoted their aea presidential addresses to presenting the Keynesian alternative to Friedman’s vision of the possibilities for macroeconomic stabilization and reduction of unemployment: James Tobin’s «Inflation and Unemployment» (aer, March 1972), and Franco Modigliani, «The Monetarist Controversy, or Should We Forsake Stabilization Policies?» (aer, March 1977). This paper examines the Keynesian analysis and policy prescriptions put forward in those addresses, in the context of the long series of critical exchanges that Tobin and Modigliani had with Friedman. The addresses by Tobin and Modigliani, once widely-reprinted and influential, lost influence in part because of focusing on specifically monetarist policy proposals tangential to the natural rate hypothesis and subsequent Keynesian/New Classical debates: the last section (before the conclusion) of Modigliani (1977) was entitled «Why Constant Money Growth Cannot Be the Answer.» This loss of influence has diverted attention from the still important and timely message of these addresses that, as expressed by Tobin (1972), «irrationality … is not logically necessary for the existence of a long-run Phillips tradeoff. In full long-run equilibrium in all markets, employment and unemployment would be independent of the levels and rates of change of money wage rates and prices. But this is not an equilibrium that the system ever approaches. The economy is in perpetual sectoral disequilibrium even when it has settled into a stochastic macro-equilibrium.»