Monetarism is the economic doctrine established by Milton Friedman, that the money supply, the total amount of money circulating in an economy, whether as currency or bank balances, is the chief controller of the level of economic activity. Monetarism has become the dominant framework of theory in both academic economics and public policy. Monetarism is an economic theory advocating that governments use interest rates and control of the supply of money for the purpose of economic regulation. Monetarism is in contrast to Keynesian economics which advocates taxation and budgetary policy or fiscal policy. Monetarism is closely associated with neo-conservatism, a version of liberalism that stresses free markets and individualism rather than the welfare state vision that had become dominant in most western societies.
Use of monetary instruments for economic regulation is said to provide a lever to influence macro-economic cycles in the economy, while avoiding bureaucratic regulation or distortions of market forces. Friedman’s monetarism became popular in Thatcher’s Britain and Reagan’s U.S.A., in the 1970s and early 1980s after the failure of Keynesian policies after the breakdown of the Bretton Woods arrangements in 1968-71.
Friedman was a pragmatist who rejected the idea of any “realistic” theory of economic action, and instead sought simply to provide governments with a lever with which to control the economy. The Keynesian policies of post-World War Two capitalism was essentially a retreat from confrontation with the working class. Capitalism turned to monetarism for a macroeconomic policy to manage the counter-attack.
The Success of the Fed
and the Death of Monetarism
N. Kindan Kishor and Levis A. Kochin. Monetarists blamed fluctuations in inflation on excessively volatile growth in monetary aggregates. The data supported this hypothesis until 1982. Since 1983 monetary aggregates have been essentially uncorrelated with subsequent inflation in the U.S.. Kochin (1973) argued that well designed monetary policy would lead to zero correlation between any measure of monetary policy and subsequent inflation.
MODIGLIANI ON MONETARISM: A RESPONSE
THOMAS MAYER, Professor, University of California Davis. This reply to Franco Modigliani's (1988) criticism of monetarism is not a consensual monetarist response but merely the reaction of a moderate monetarist or, perhaps I should say, a monetarist fellow traveler. Specifically, I comment on how Modigliani defines monetarism, how he treats stabilization policy, the lesson he draws from the 1980s monetary experience, and how he treats the velocity adjusted monetary growth rate rule.
MONETARISM AND THE USE OF MARKET PRICES AS MONETARY POLICY INDICATORS
ROBERT E. KELEHER. Recently proposed strategies for employing market price indicators as guides to monetary policy embody many key propositions of monetarism. Moreover, market price advocates' prescribed policy instruments and operating procedures for conducting monetary policy are not inconsistent with a monetarist perspective and fully incorporate the incentive structure of the money creation process. The market price approach differs from monetarism in three key areas: the data employed to measure intermediate indicators, the environments in which the approach works, and the policy role of the dollar. More specifically, the market price approach employs data that are readily available in unrevised form and that make better use of limited information than do monetary or reserve data.
BEYOND KEYNESIANISM AND MONETARISM
MANCUR OLSON, University of Maryland. Though there is consensus among economists about microeconomic theory, neither the Keynesian nor the Monetarist theory of macroeconomics has attracted a consensus, presumably because neither is compelling enough to persuade the skeptical. A new approach to the subject that combines insights from each of the familiar schools with considerations that both schools have overlooked is accordingly offered here. This argument accepts the evidence that involuntary unemployment and depressions sometimes occur and thus rejects the finding of the new classical or equilibrium macroeconomics, that markets always clear and that all individuals and firms are in equilibrium. It also rejects the Keynesian assumption of wages or prices arbitrarily fixed at disequilibrium levels, and insists that any adequate theory must show what interests are served by the existence of involuntary unemployment.