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INTRODUCTION
Friedman and Lucas have probably been the most influential economists of the second half of the twentieth century: between them they were able to throw the Keynesian paradigm off its pedestal. According to the standard view, their dismissal of Keynesianism was a two-step process; its first stage is associated with monetarism and the second with new classical macroeconomics. While such a statement is historically right, it incorrectly suggests a line of continuity between monetarism and new classicism. The aim of this paper is to criticize this interpretation and argue that important methodological differences separate Friedman and Lucas.
To this end, I will compare Friedman's [1968] "The Role of Monetary Policy" and Lucas' [1972] "Expectations and the Neutrality of Money", these two authors' most influential papers. Friedman's article launched the charge against Keynesian economists' will to seize upon the Phillips Curve as a tool for reducing unemployment, epitomized in Samuelson and Solow [1960]. Lucas' paper, while aiming at giving stronger micro-foundations to Friedman's claim of policy-ineffectiveness, paved the way to modern dynamic macroeconomics. The contribution usually attributed to Lucas is that he replaced adaptive with rational expectations. Although this is of course true, there is more to it. In particular, I will show that this replacement is underpinned by a change from a Marshallian to a Walrasian approach to equilibrium. Among other things, I will emphasize that Friedman's model is a disequilibrium model (a standard outcome of the Marshallian conception of equilibrium) whereas disequilibrium has no place in Lucas' model.1
Forerunners of the present paper are Laidler [1981; 1982], Hoover [(1984) 1990; 1988]; Howitt [(1986) 1990] and Hartley [1997]. For example, Hoover makes the following claims about the relationship between Friedman and Lucas:
Friedman argues that what separates monetarists from Keynesians are differences of empirical judgment, not of theoretical principle. His relation to the new classicals appears to be just the reverse: their empirical judgments are broadly similar while their theoretical paths to those judegements are, at times, strikingly different [(1984) 1990, 534].
Friedman, as one important monetarist, differs from the new classicals on a fundamental point of methodology: he is a Marshallian; they are Walrasians [(1984) 1990, 528].
This paper focuses on the differences between Friedman's and Lucas' concepts of equilibrium.2 Moreover, it...