"We lost a giant in economics." Those were the words of economist and fellow Nobel laureate Paul Samuelson yesterday as he commented on the passing of Milton Friedman. In an editorial today, The Wall Street Journal referred to Friedman as "arguably the greatest economist of the 20th century."

Clearly, Friedman was a giant despite his diminutive size. His work at the University of Chicago evolved into what became known as the "Chicago School" of economics, a brand of economic thought that placed emphasis on free markets, libertarianism, and of course, monetarism. (Monetarism is the idea that the central bank must strictly monitor the growth in the money supply so as to balance the supply of money with the demand for it.)

In the 1971 book he co-authored with Anna Schwartz, titled Monetary History of the United States 1867-1960, Friedman argued that "inflation is always and everywhere a monetary phenomenon." Moreover, he felt that it was government, in almost all cases, which was at the root of inflation. This is a belief shared by nearly all monetarists to this day.

A rival to the giant
There can be no doubt that Friedman's ideas have had an enormous influence on economic policy and the global markets over the last 30 years. However, it would be a great mistake to overlook an equal, if not greater, giant of economics: John Maynard Keynes. Keynes would surely be on anyone's short list of the greatest economists -- if not social thinkers -- of the 20th century. And as economists go, he was the antithesis of the libertarian monetarists of the Chicago School as represented by Friedman. Rather than embrace such laissez-faire attitudes, Keynes believed that government should play an active role in the economy by using fiscal policy combined with monetary policy to help eliminate recessions and control economic booms.

In his 1936 blockbuster book, The General Theory of Employment, Interest and Money, Keynes virtually revolutionized economics. For much of the 20th century, that treatise was considered one of the most influential in all the field of social sciences, and it permanently changed the way people thought about economies and the role of government in society. Few would argue that it was the ideas and policies espoused by Keynes that eventually brought the world out of the terrible depression of the 1930s and led it on a path to prosperity uninterrupted and unmarred by the panics and depressions of the prior century.

Contrarians emerge
Milton Friedman was among the generation of economists who grew up in a world where the Keynesian view and the policies derived from it completely dominated economic and public policy, but he and others eventually went on to critique it on their own terms. First, they viewed government intervention as having the capacity to create "stagflation," the combination of low growth and high inflation that developed economies suffered in the 1970s.

Secondly, Friedman and other monetarists believed that it was impossible for the government to fully make all the necessary economic calculations and decisions required to organize a vast and complex economy. They pointed at socialism and Marxism and predicted that the economies under these systems would soon meet their demise. It was only a matter of time.

The most efficient allocation of resources -- labor, capital, material -- could only occur as a result of the free and collective action of millions of actors, they felt. This was a view also held by members of the so-called "Austrian School," a conservative school of economics epitomized by economists and social thinkers such as Ludwig von Mises and Friedrich von Hayek, both of whom made their influence felt on Friedman.

By the late 1970s, with inflation running rampant in the United States, a new Fed chairman by the name of Paul Volker decided to take monetarism out of the ivory tower and put it to the test in the real world. The results were brutally effective. By sharply increasing interest rates, Volker stopped the growth of money in its tracks and set it on a downward path that would last the next 10 years. Monetarism had proved itself beyond anyone's wildest imagination -- except Milton Friedman's.

Or so it seemed.

A change in the wind
One of the principal tenets of monetarism is that a change in the interest rate will have a substantial effect on (aggregate) investment. In contrast, Keynesians believe that a change in the interest rate has little effect on aggregate investment. What followed the Volker rate hikes sheds light on what may have been the real forces driving the U.S. economy after that monetarist onslaught.

Although the Fed's monetary policy succeeded in slowing the rate of money growth and bringing down inflation, higher interest rates did not lead to weaker investment as monetarists should have expected. Instead, growth and investment picked up following the 1982 recession and continued uninterrupted for the next seven years, even with declining liquidity.

Monetarists could have argued (and many did) that the growth pickup was exactly due to improved expectations. Now that investors felt less fearful of inflation, they had more confidence to invest.

Sounds good, except for one thing .

Government deficits under then-President Reagan were surging, hitting levels not seen at any other time in the post-WWII period (when taken as a percentage of GDP). According to monetarist theory, government spending should have been driving monetary growth and inflation, but it was not happening. Inflation continued to fall, as did money supply growth and interest rates. However, the economy was booming.

Sound Keynesian? That's because it is.

In short, there are many more examples of this nature -- where upon casual observation, it looks like monetarist policies are driving economies, but when you look beneath the surface, there is often a heavy dose of fiscal stimulus (or lack thereof) going on.

Maybe that's why Milton Friedman once said, "We are all Keynesians now."

Fool contributor Mike Norman is an international economist and founder of the Economic Contrarian Update . He can be seen on Fox News , where he appears as a business contributor. In addition, he hosts a radio show on the BizRadio Network .