2.1 – The relevance of the budgetary weapon

24The issue of private expectations is at the core of Keynes’ plan: first, how to reverse a condition of pessimistic long-term expectations; second, how to maintain these expectations at their full employment level. These two issues must be clearly separated if we are to understand properly fiscal policy as advocated by Keynes. The first, which Keynes dealt with at the time of the ‘Keynesian Revolution’, concerns the cure for unemployment whenever it appears. The second, on which Keynes concentrates after the General Theory, mainly concerns the prevention of unemployment.

25With respect to the cure for unemployment, the key role of public works is to “break the vicious circle” [Keynes, 1933, in CW 21: 158]. In the language of the General Theory, ‘pump-priming’ aims to raise the marginal efficiency of capital. Targeting the pessimistic expectations of both investors and entrepreneurs, the state initiates public works to falsify private expectations and thus boost private investment; and, importantly, not as a direct substitute for the latter. [13] It must be emphasised that Keynes’ purpose is to boost the market for new capital goods— the production of consumption goods will follow on. Thanks to state intervention, investors are faced with an increase in aggregate demand and they are compelled to revise their expectations of future prices and profits. In other words, public works aim to modify private agents’ long-term expectations.

26The second issue, crucial to our investigation, is the prevention of unemployment. Keynes is somewhat cryptic when he states in the General Theory that “a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment” [Keynes, 1936, in CW 7: 378; emphasised added]. But Keynes returns to this issue during World War 2 when he takes part in the debate over post-war employment policy. In this debate “what Keynes proposed is the creation of long-run stable government policies to help maintain business confidence in the future” [Bateman, 2003: 81]. [14] Here again Keynes concentrates his attention on investment, rather than on consumption. With reference to Friedman’s permanent income hypothesis, it is worth noting that Keynes does not believe that households would quickly adapt their consumption-demand if taxation in general (and not only national insurance contributions) varied from year to year. He considered that “people have established standards of life” [Keynes, 1943, in CW 27: 319]. Hence “a remission of taxation on which people could only rely for an indefinitely short period might have very limited effects in stimulating their consumption” [Keynes, 1943, CW 27: 319]. Secondly, Keynes strongly opposed deficit budgeting: [15] “The capital budgeting is a method of maintaining equilibrium; the deficit budgeting is a means of attempting to cure disequilibrium if and when it arises” [Keynes, 1943, in CW 27: 352-353], the latter being a “particular, rather desperate expedient” [ibid.: 354]. Deficit budgeting through the Revenue or Ordinary Budget [16] is likely to involve short-term devices and temporary government spending that would not greatly influence private expectations. What is more, it might be possible that “government manipulations of tax and interest rates could only increase the state of uncertainty and the instability of behavioural relations” [Kregel, 1985: 45]. In contrast, capital budgeting [17] entails recurrent programmes and long-lived capital schemes, that are much more effective in fixing private expectations at the full employment target. As Dos Santos Ferreira puts it: “The ‘socialisation of investment’ involves the idea that the state assumes control of a coordination failure between consumers’ and entrepreneurs’ inter-temporal decisions.” [Dos Santos Ferreira, 2000: 290]

27The Capital Budget is the basic institution that must be established to effect the socialisation of investment. It aims to “balance and stabilise the Investment Budget for the national economy as a whole” [Keynes, 1945, in CW 27: 409]. Keynes’ plan is to prevent large fluctuations in private investment through long-term public capital expenditure. This is where we find the rule aspect of Keynes’ programme: “Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations.” [Keynes, 1943, in CW 27: 323]. For Keynes, about the two-thirds of total investment would be involved, which seems at first sight quite comprehensive [Keynes, 1943, in CW 27: 322]. But “by ‘socialisation of investment’ Keynes did not mean nationalisation” [Skidelsky, 2011: 11] since it “need not exclude all manners of compromises and of devices by which public authority will co-operate with private initiative” [Keynes, 1936, in CW 7: 378]. [18] As soon as one looks carefully at Keynes’ writings on policy it becomes plain there is no foundation for the exclusive association of Keynes with advocacy of ‘fine-tuning’ for the economy, nor with the idea that state intervention is a substitute for private initiative. The Keynes of World War 2 is mainly concerned with the implementation of a long-term employment programme capable of fixing expectations at full employment by the operation of definite rules. But this does not preclude small adjustments, what Keynes calls in another note the “proposals for adjusting its tempo to unforeseen changes” [Keynes, 1943, in CW 27: 357]. [19] Here is to be found the opportunistic or discretionary side of his scheme: the state should not be prevented from judicious policy adjustments, so that Keynes’ programme would be better known as one based upon ‘discretionary rules’, “the means of ensuring stability in the long-term investment programme coupled with proposals for adjusting its tempo to unforeseen changes” [ibid.]. Hence, “Keynes alleged ‘short-termism’ applied not to the goals he chose for society but to the need for constant adaptation of policy measures to keep on the right path” [Peacock, 1993: 20].

28How might successful long-term employment policy be achieved? As we have seen, the first condition is to obtain information on private capital expenditure, “the continuous current collection both of the statistics of current performance and of prospective plans by the private sector” [Keynes, 1945, in CW 27: 409]. Here is the answer to Friedman’s opinion that “we do not know enough”. Secondly, Keynes opposes “wasteful and unnecessary enterprises” [Keynes, 1943, CW 27: 321]. On the contrary, he hoped that “capital expenditure would, at least partially, if not wholly, pay for itself” [ibid.: 319-20]. Hence such expenditure is supposed to be profitable even if only in the very long-run, and even if indirect benefits have to be taken into account. Here is the answer to Freidman’s caricature that the General Theory advocated “filling-holes type of make-work” [1962: 81].

29Let us now turn to Friedman’s criticism of fiscal policy. Over time he modified his criticism. In “Monetary and Fiscal Framework for Economic Stability”, the Friedman of 1948 is not opposed, as a matter of principle, to fiscal policy. Here “deficits or surpluses themselves become automatic consequences of changes in the level of business activity” [Friedman, 1948: 251]. While he then agreed with the role of the government budget as an ‘automatic stabiliser’, he did oppose fine-tuning of the economy, since delays added to price rigidities might “render extremely uncertain” [Friedman, 1948: 253] the efficiency of such a proposal. The Keynesian flavour of this scheme is striking, echoing for example Meade’s advocacy during WW2 of social security plans in line with the Beveridge Report.

30Later, in Capitalism and Freedom [1962], Friedman’s argument against fiscal policy was reinforced. Friedman now insisted that, because of lags and delays, unfortunately “the balance wheel is unbalanced” [Friedman, 1962: 76]. Indeed, because of their ‘stop-and-go’ character and time-lags, governmental expenditures might actually be pro-cyclical. Hence “far from being a balance wheel offsetting other forces making for fluctuations, the federal budget has if anything been itself a major source of disturbance and instability” [Friedman, 1962: 77]. So far, Keynes would at least partially share Friedman’s objection. Indeed, Keynes himself acknowledged that “a fluctuating volume of public works at short notice is a clumsy form of cure and not likely to be completely successful” [Keynes, 1943, in CW 27: 326]. In Keynes’ view, that ill-timed measures might prove pro-cyclical cannot be excluded in principle. That is why Keynes lays so much emphasis on the long-term issue.

31Friedman then radicalized his 1969 assault on fiscal policy. Indeed, he now argues that:

32

I believe that the state of the government budget matters; matters a great deal—for some things. The state of the budget determines what fraction of the nation’s income is spent through the government and what fraction is spent by individuals privately. The state of the government budget has a considerable effect on interest rates.

33Even if, so far as we know, the term was not used by Friedman the argument clearly refers to the crowding-out effect associated with the ‘Treasury View’ during the Great Depression. For Friedman, “the state of the budget by itself has no significant effect on the course of nominal income, on inflation, on deflation, or on cyclical fluctuations” [Friedman, Heller, 1969: 51]— its sole effect being the distribution between public and private expenditures. By this stage Friedman’s position has become so radicalised that he definitely parts company with Keynes.

34We shall draw conclusions on state intervention in general below. For the time being we can draw some conclusions on the efficacy of fiscal policy. Despite the Keynesian flavour of Friedman’s position in 1948 where he acknowledged ‘automatic stabilisers’, Friedman the elder is characterised by a radicalised dismissal of the efficacy fiscal policy. Some of the arguments he advanced would not have been entirely denied by Keynes. Indeed, Keynes’ basic aim is to fix long-term expectations at their full employment level. From this perspective short-term devices are considered to be ‘small’ adjustments subordinated to long-term schemes. That is why measures relying on deficit budgeting and concentrating on counter-depression measures would in the short run prove relatively ineffective.

2.2 – Monetary policy

35There are two issues to be distinguished when dealing with Keynes on monetary policy. On the one hand, monetary policy might be impotent because of excessively pessimistic expectations of initial recovery following a protracted slump. On the other, the maintenance of a stable and very low rate of interest is critical if recovery is to be sustained. Keynes does in fact attribute efficacy to monetary policy—but this depends on particular characteristics of time and place:

36

I am far from fully convinced by the recent thesis that interest rates play a small part in determining the volume of investment. It may be that other influences, such as an increase in demand, often dominate in starting a movement. But I am quite unconvinced that low interest rates cannot play an enormous part in sustaining investment at a given figure.”

37Keynes concentrates on the long-term rate of interest because, being long-lived, capital assets are much more sensitive to long rates than short rates. However, this obviously involves the management of the entire rate structure. At the end of the thirties, when the first inflationary pressures appeared after the protracted slump, this insistence on a low and stable long-term rate of interest led Keynes to oppose forcefully dear money policy aimed at curbing a boom and hence avoiding inflation. For him, “the long-term rate of interest must be kept continuously as near as possible to what we believe to be the long-term optimum. It is not suitable to be used as a short-period weapon” [Keynes, 1937, in CW 21: 389]. Keynes at that time advocated planning and control rather than a rise of the rate of interest, since the latter amounted to “playing with fire” [Keynes, 1937, in CW 21: 389]. As a result he favoured what could be called in Friedman’s terminology a ‘monetary rule’: a stable long-term rate of interest that slowly decreased as the marginal efficiency of capital declined. How might such a ‘rule’ be implemented? First of all, a high degree of confidence has to be established with regard to current rates before attempting a further decrease, since the fall in government securities takes time to completely influence the entire interest rate structure. Moreover, if the Treasury were in charge of borrowing on long-term capital schemes, this would make the “management of the market generally” [Keynes, 1942, in CW 27: 280] easier.

38The counterpart of the budgetary policy advocated by Keynes can thus be formulated as “a policy of aiming at a long-term equilibrium rate, which helps to maintain average capital expenditures at the right figure, even if this requires a progressive change in the standard rate from time to time, a change which is more likely to be in the downward than the upward direction” [Keynes, 1944, in CW 27: 377]. We have shown above that fiscal policy is based on long-term plans, short-term devices being subordinated to the latter. There is symmetry with respect to monetary policy. On the one hand there is the general rule of a very low and stable long-term rate of interest. But on the other hand, there are also necessary adjustments to the rule when required by particular circumstances. So again Keynes’ monetary policy would be best called a ‘discretionary rule’. [21] In the simplest of the terms, the fundamental object of this rule is to manage the liquidity-preference of private actors, giving them confidence in their expectations.

39Let us now turn to Friedman. In his AEA Presidential Address he insisted that monetary policy “cannot peg interest rates for more than very limited periods” [Friedman, 1968b: 5]. Indeed, the relevant variable is the real rate, determined by the real forces of the economy. Monetary policy will be efficacious only in the short-run, during the lapse of time when private agents fail not correct their price-expectations. As soon as expectations are corrected, as soon as the bargained real-wage is the correct one, the expansionary effect of the policy disappears. In the long run, the sole effect of an expansive monetary policy is inflationary. Consequently, the objective assigned to monetary policy is to “provide a stable background for the economy – keep the machine well oiled to continue Mill’s analogy” [Friedman, 1968b: 13]. Therefore individuals “can proceed with full confidence that the average level of prices will behave in a known way in the future” [ibid.]. Friedman’s argument against discretionary monetary policy relies on an argument similar to the fiscal argument discussed above: “We do not know enough to be able to recognize minor disturbances when they occur or to be able to predict either what their effects will be with any precision or what monetary policy is required to offset their effects.” [Friedman, 1968b: 14] Hence, the monetary authority should “avoid sharp swings in policy” [ibid.: 15]. The monetary rule he then advocates to anchor private expectations consists in a fixed rate of growth of money. As argued in Capitalism and Freedom, “the precise definition of money adopted, or the precise rate of growth chosen, makes far less difference than the definite choice of a particular definition and a particular rate of growth” [Friedman, 1962: 54]. For Friedman, the best that monetary authorities can do is to provide a stable monetary framework to anchor private agents’ expectations of inflation. Friedman’s employment policy amounts to the stabilisation of the economy on its long-run growth-trend, which is consistent with the emphasis placed today on the need to damp fluctuations detrimental to collective welfare. But to base a monetary rule on a rigid money supply growth presupposes a highly stable velocity of money-demand –a conjecture that hardly fits into Keynes’ monetary economy. The most important practical difficulty in implementing such a rule is to maintain a ratio between the monetary base (currency plus bank reserves) and the money supply (currency plus bank deposits). To this end, Friedman argued as early as 1948 in favour of “a reform of the monetary and banking system to eliminate both the private creation or destruction of money, and discretionary control of the quantity of money by central-bank authority” [Friedman, 1948: 247). The purpose here was mainly to avoid the creation of endogenous money by the banking sector. Obviously, favouring rules over discretion does not preclude direct intervention in institutions. [22]

40What are the lessons to be learnt at this stage of our inquiry? It can hardly be argued that Keynes and Friedman are completely at odds, especially when debate involves the fine tuning of the economy. Both of them to some extent advocate rules, and favour long-term and known-in-advance measures. In particular, Keynes would have shared some of Friedman’s arguments against ill-timed short-term actions. Both would use monetary policy to stabilise the economic system. Yet our authors part company on the practical conduct of these rules. Indeed, on the one hand Keynes’ target is to keep the long-term rate of interest as low as possible. To this end, the monetary authority is supposed to “feed the market” [Keynes, (1942) 1978: 416] with securities having different maturities in order to saturate the liquidity-preferences of the public. Since the necessity for small adjustments is acknowledged as a matter of principle, Keynes’ rule is actually a ‘discretionary rule’. In line with his general ‘Middle Way doctrine’ as emphasised by O’Donnell [1989], Keynes is quite pragmatic in his advocacy. On the other hand, Friedman’s rule involves fixed growth of the quantity of money, and public spending financed by bonds is definitely rejected because of the associated rise in the interest rate on the loanable funds market. In sharp contrast to Keynes, Friedman is highly dogmatic in the application of his rule. He wants to see public authorities tied hand and foot.

41Keynes’ and Friedman’s pleas appear similar insofar as they are formulated in terms of rules. But to understand their respective targeting of the rate of interest or the money supply rate of growth we should consider their respective views on the stability of the monetary side of the economy. Beyond these contrasting positions regarding what counts as the ‘real’, tending either to pragmatism or dogmatism, there remain diverging conceptions of the rate of interest. Indeed, their arguments are based upon opposed theoretical foundations: whereas for Keynes state intervention is precisely intended to influence private expectations, quite the opposite is true for Friedman: he consider that once private agents realise that they have been manipulated, the temporary effect of an expansionary policy disappears.

3.1 – Friedman and Keynes on the ‘adjustment process’

43Friedman’s [1977] point of departure in his study of the adjustment process that returns the economy to its previous natural rate position following expansionary policy—the rate of inflation excepted—is an unanticipated change in aggregate demand which leads first of all to an increase of output—and thus of employment—and prices. [23] This happens exclusively because of errors of perception on the part of both employers and employees. This is because “employees and employers have access to current information regarding prices of the goods and services they sell but are subject to misperceptions regarding prices of the things they buy” [Garrison, 1984: 121]. As soon as the perceived real-wage corresponds to the existing one, both workers and employers adjust their respective supply and demand, and the economy comes back to the vertical long-term Phillips curve. The sole means of obtaining a permanent gap between the ‘market’ and the ‘natural’ rate of unemployment is to permit an inflationary spiral. Hence, “only surprises matter” [Friedman, 1977: 456].

44What does Friedman’s ‘adjustment process’ tell us about the divide between Keynes and Friedman? Firstly, Friedman postulates full employment, so that there is obviously no room for discretionary policy to fill a supposed deflationary gap. If the analysis stopped here the question of our authors’ respective standpoints would degenerate into tautology: active state policy is considered to be efficient or inefficient quite independently of whether the economy is supposed to have already attained its full employment level. Clearly, Keynes would agree with Friedman on the following point: if effective demand continues to rise when the economy is already at its full employment level, a further rise in employment is not excluded as a matter of principle, but would be only temporary—so long as entrepreneurial misperceptions are not corrected. [24] As is now well-known, Keynes’ argument in favour of public spending in a state of underemployment relies in no way on money illusion. [25]

45It is not merely by chance that, when Keynes takes account of erroneous expectations, over-optimism is attributed only to the employers. In Friedman’s system, the employment-level can—temporarily—rise only because of misperceptions of the labour market. Ultimately, it is labour market functioning that determines the employment level. In Keynes’ monetary framework, it is quite otherwise: “The volume of employment is uniquely related to a given level of real wages—not the other way round.” [Keynes, 1936, in CW 7: 30, emphasis added]. This derives from the monetary character of the economy, “for there may be no method available to labour as a whole whereby it can bring the wage-goods equivalent of the general level of money-wages into accordance with the marginal disutility of the current volume of employment” [Keynes, 1936, in CW 7: 13]. [26] Here is to be found the first theoretical underpinnings of Keynes’ and Friedman’s respective views on appropriate employment policy, namely their treatment of the labour market. For Friedman, and also the Classics targeted by Keynes in Chapter 2 of the General Theory, the employment level is directly determined by the real wage level. Even if the labour force bargains over the money-wage, it is as if wage-bargains were to bear directly on the real wage—except in case of transitory misperceptions. That is, a rise in employment is directly obtained through a fall in real wages. Instead, in Keynes’ monetary economy, labour market functioning is merely the by-product of what happens on the goods market. Real wages will move according to changes in the employment level. The labour force cannot bargain with anything but money wages. In our view, this divergence in treatments of the labour market is evidence of differing conceptions of the general functioning of the economy, and in particular of the interactions between real and monetary spheres. In what follows below, we try to go a step further and to make explicit why Friedman is led to postulate full employment in his analysis of the adjustment process.

3.2 – Keynes’ “monetary economy” versus Friedman’s “neutral economy”

46In Friedman’s economy expansionist policy is—temporarily—efficient only when unanticipated, thus leading to faulty perceptions. For him, discretionary state intervention is destabilising per se. By contrast, in Keynes’ economy expansionary policy is more efficient when anticipated, since it is precisely intended to manage the private sector long-term state of expectations. To explain this somewhat paradoxical result, our hypothesis is that Keynes and Friedman actually deal with similar economies: in neither of these economies is money a ‘veil’ since it might be used to insulate oneself against unexpected events, but all the same quite different kinds of uncertainty prevail.

47Let us start with Friedman’s conception of uncertainty. This issue is explicitly tackled for the first time in “In Defense of Speculation” [1960]. In this plea against market instruments, such as the holding of ‘buffer stocks’, Friedman analyses why people would accept payment of a premium to insure themselves against price fluctuations. The analogy made in this paper refers to casinos, lottery games and the like, so that ‘states of the world’ are fully known in advance, just like the distribution of probability. In Knight’s usage [1921], ‘risk’ rather than ‘uncertainty’ prevails here. In such a context Friedman is right in arguing that speculation ensures the marketability of commodities, rather than being destabilizing. This issue of uncertainty is taken up in “The Optimum Quantity of Money” [1969]. [27] Here, Friedman’s conception of uncertainty is applied to his money demand function. The fifth characteristic of Friedman’s monetary framework runs as follows: “The society, though stationary, is not static. Aggregates are constant but individuals are subjects to uncertainty and change. Even the aggregates may change in a stochastic way, provided the mean values do not” [Friedman, 1969: 2], what he calls “individual uncertainty” [ibid.: 3]. Consequently, in a Friedmanite world people would of course hold money to protect themselves against these stochastic changes. Indeed, besides the transaction-purpose:

48

A second reason for holding money is as a reserve for future emergencies. In the actual world, money is but one of many assets that can serve this function. In our hypothetical world, it is the only such asset. This reason corresponds to the ‘asset’ motive for holding money.
It should be noted that both reasons depend critically on characteristic (5) of our economy, the existence of individual uncertainty.

49Again, as the distributions of probability are fully known by individuals there is no uncertainty as such, but only risk. Even if present in the money demand function, the rate of interest actually plays the role of a borrowing cost, an opportunity cost for individuals who insure themselves against the risk that the value of their assets may vary because of random error. The motive of money demand involved here is actually the precautionary-motive in Keynes’ meaning of the term. There is no liquidity-risk, so that Friedman ignores “the essence of uncertainty” [Davidson, 1974: 91]. More precisely, Friedman’s agents “are not Keynesian ‘liquidity preference’ speculators between money and bonds. They are Fisherian speculators between goods, or equities in goods, and money” [Tobin, 1974: 81]. Individuals might hold money, but definitely not for a liquidity motive.

50Now, in Keynes’ system, “no sampling from the future is feasible to ascertain probabilities for future alternatives, so there is no way uncertainty problems can be reduced to problems involving risk” [Weintraub, 1975: 532]. In an economy where uncertainty rather than risk prevails, in which “we simply do not know” as Keynes [1937, in CW 14: 114] famously puts it, money is not a good substitutable for all assets held, including semi-durable goods. As the distribution of probability is not fully known, there is now room for a liquidity risk. As stated by Hayes [2006: 21], “liquidity has value only because the future is unknown, and its value increases with our fear of what might happen that we cannot prevent or insure against”. The speculative-motive is defined by Keynes as “the object of securing profit from knowing better than the market what the future will bring forth” [Keynes, 1936, in CW 7: 170]. To put it very briefly, Keynes’ speculators do not face risk. In a way, they know better than ‘the’ market what the future will be, and then play against the market.

51These contrasted conceptions of uncertainty lead our authors to hold quite different conceptions of the role played by the rate of interest, and thus adhere to quite different monetary rules. For Friedman, “the price of money …is the inverse of the price-level—not the interest rate. The interest rate is the price of credit” [Friedman, Heller, 1969: 75]. Public spending financed by bonds will simply crowd-out private investment: “If the federal government runs a large deficit, that means the government has to borrow in the market, which raises the demand for loanable funds and so tend to raise interest rates.” [Friedman, Heller, 1969: 50] For Keynes of course, quite the reverse is true: the rate of interest is par excellence a monetary phenomenon that equilibrates a stock market of financial assets and not a flow credit market. As Leijonhufvud [1968]clearly shows, in a world where newly produced capital goods are adequate substitutes for existing financial assets the rate of interest is not merely a borrowing cost.

52What Keynes’ and Friedman’s economies have in common is the use of monetary assets to protect against unexpected events. To this extent, the monetary side of their theoretical worlds seems similar. Yet Friedman basically deals with actuarial risk, whereas Keynes’ concern goes far beyond that and is basically directed to liquidity-risk. Hence liquidity preference appears to be a ‘blind spot’ in Friedman’s framework. To highlight this point, it seems useful to come back to a classification of different types of economy used by Keynes in his work prior to the General Theory. Indeed, in the first drafts of this work, Keynes distinguishes three different kinds of economy: a real wage economy – also called a cooperative economy; a neutral economy; and finally an entrepreneur economy – also called a money-wage economy. In the first one, “the factors of production are rewarded by dividing up in agreed proportions the actual output of their cooperative efforts” [Keynes, 1933, in CW 29: 77]. In a neutral entrepreneur economy, the factors of production are rewarded in terms of money. However, “there is a mechanism of some kind to ensure that the exchange value of the money incomes of the factors is always equal in the aggregate to the proportion of current output which would have been the factor’s share in a co-operative” [Keynes, 1933, in CW 29: 77]. Finally, in an “entrepreneur economy” (also called a “money-wage economy”) the factors of production are rewarded in terms of money, but the “mechanism of some kind” that ensures that the actual product will be bought back is lacking. The key characteristic of a monetary economy is then the following:

53

Money is par excellence the means of remuneration in an entrepreneur economy which lends itself to fluctuations in effective demand. But if employers were to remunerate theirs workers in terms of plots of land or obsolete postage stamps, the same difficulties could arise. Perhaps anything in terms of which the factors of production contract to be remunerated, which is not and cannot be a part of current output and is capable of being used otherwise than to purchase current output, is, in a sense, money. If so, but not otherwise, the use of money is a necessary condition for fluctuations in effective demand.

54If the factors of production were paid with old stamps they would be able to hoard stamps and thus to defer purchasing power for an indefinite period. In this sense, stamps would then become ‘money’ insofar as they will be used some day as a means of payment.

55Friedman’s economy does actually correspond to a “neutral” entrepreneur economy as defined by Keynes. There is no necessity to hold money except to prevent oneself against risk. There is no basic impediment to full employment and thus no role that the state is supposed to play, except to keep the economy ‘well-oiled’. By contrast, in Keynes’ “entrepreneur economy”, where uncertainty prevails, private agents have to form expectations, but they also need to have confidence in those expectations. Here a key role for the state is to control the long-term state of expectation by means of a long-term employment policy.