Honestly, I didn’t even remember where I saw these 2 words before. I went ahead did some research online. I would like to share the following information so some students like me will know a bit of the history of keynesianism vs monetarism.
Keynesians vs. Monetarists
Keynesians and Monetarists fought head-to-head in the 1970s. Most economists conclude that Keynesians won the war, but Monetarists won many battles. Because of the healthy debate, Keynesians are more convinced of the importance of the money supply and monetary policy, especially over the long run. They are more acutely aware of the long-term threat to price stability that rapid money growth can bring. Keynesians are also now more likely to prefer monetary policy to fiscal policy.
TABLE 1 | |
Monetarists | Keynesians |
Tie monetary policy to rules | Give policymakers discretion. |
Fiscal policy is not useful. | Fiscal policy may be useful. |
AS curve has a steep slope. Economy is inherently stable. | Economy can be unstable. AS curve can be flat. |
Despite the convergence, substantial differences remain between the two bodies of thought. We summarize the more important differences here and in Table 1.
- Keynesians argue that the Fed should use discretion in conducting monetary policy, while Monetarists advocate a long-run money growth rule.
- Keynesians still view fiscal policy as potentially important. Monetarists are less convinced of the usefulness of fiscal policy.
- As a general rule, Keynesians believe that the Aggregate Supply curve is more horizontal than vertical in the short run so stabilization policy can have big impacts on output and employment. Because Monetarists believe that the economy is inherently stable, they tend to view the Aggregate Supply curve as more vertical so discretionary stabilization policy is not as important.
Although differences remain, the debate between Keynesians and Monetarists cooled considerably in the 1990s. Monetarists could no longer defend a simple relationship between M1 and nominal GDP. Many Monetarists now emphasize the longer-run relationship between M2 growth and nominal GDP growth. Although Keynesians do not stress the importance of money growth as much as Monetarists, the focus on the long run is much less controversial.
Keynesianism emphasizes the role that fiscal policy can play in stabilizing the economy. In particular Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker. Keynesians say it is a mistake to wait for markets to clear like classical economic theory suggests.
Monetarism emphasizes the importance of controlling the money supply to control inflation. Monetarists are generally critical of expansionary fiscal policy arguing that it will cause just inflation or crowding out and therefore not help.
I don’t intend to be an economist nor a politician. I think the government or Central Banks should attempt to stabilize the economy through monetary and fiscal policy. They should not aim to avoid every cyclical fluctuation. But, intelligent monetary and fiscal policy can avoid the worst excesses of boom and bust. In a recession, fiscal policy can play a role in shortening the duration and intensity of the recession.
Disasters require urgent action to prevent repetition. Unfortunately, the government missed its best timing to do so. Let’s not blame Milton Friedman or George Bush. Let’s focus on Ben Bernanke and Obama. From Obama’s Medicare to 3 years’ EDD to more than $.5B government loan to Solyndra to the highest unemployment rate since WWII, from Bernanke commented in Sept 2009 “Recession is very likely over” to officially accepted in Sept 2011 “The world economy is entering a seriously “dangerous” phase”, I could not figure out there is one way or another can help the US economy. The government and Fed need to work together and be creative due to the uncertainty and complication of the global economic and political environment. Maybe a combination of keynesianism and monetarism will help us step out of morass. The biggest winners are not the Keynesians nor the monetarists, but all of us counting on an economic recovery.
