 |
Business | Industries | Finance | Tax |
| Index: > A B C D E F G H I J K L M N O P Q R S T U V W X Y Z |
|
|||||
| First Prev [ 1 2 3 ] Next Last |
Monetarism is based on the work of Milton Friedman, who was among the generation of conservative economists to accept Keynesian theory and then critique it on its own terms. He and Anna Schwartz wrote an influential book on the monetary history of the United States, and argued that " inflation is always and everywhere a monetary phenomenon". Friedman advocated a central bank policy aimed at keeping the supply and demand for money at equilibrium, as measured by growth in productivity and demand. Many monetarists back, or at least are sympathetic to, a return to some form of gold standard as a way of preventing misallocation of capital and preventing fiat money from being inflated, since their view is that government action is at the root of inflation. However, Milton Friedman is not one of these. He views the gold standard as highly impractical. The current head of the US Federal Reserve, Alan Greenspan, is generally regarded as being monetarist in his policy orientation.
Critics of monetarism include both neo-Keynesians who argue that demand for money is not extrinsic to supply, and by some conservative economists who argue that demand for money cannot be predicted. Joseph Stiglitz has argued that the relationship between inflation and money supply growth is equivocal for ordinary inflation, as opposed to rapid inflation (meaning perhaps more than 10% year-over-year) which is almost universally regarded as an effect of government spending at a time when output growth can not absorb it. (See inflation by government spending)
Monetarism is an economic theory which focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
This theory draws its roots from two almost diametrically opposed ideas: the hard money policies which dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the interwar period during the failure of the restored gold standard, proposed a demand-driven model for money which was the foundation of macroeconomics. Whereas Keynes had focused on the value stability of currency - with the resulting panics based on an insufficient money supply leading to alternate currency and collapse - Friedman focused on price stability - the equilibrium between supply and demand for money.
The result was summarized in his historical analysis of monetary policy: Monetary History of the United States 1867-1960, which attributed inflation to excess money supply generated by a central bank. It attributes deflationary spirals to the reverse effect: failure of a central bank to support M1 during a liquidity crunch.
Broadly speaking, monetarism is that school of economics which is based on the price stability model of money supply. While associated with conservative economics and economists, not all conservatives are monetarists, and not all monetarists are conservatives.
The rise of monetarism within mainstream economics dates mostly from Milton Friedman's 1956 restatement of the quantity theory of money. Friedman argued that the demand for money depended in a stable and predictable manner on several major economic variables. Thus, if the money supply was expanded, people would not simply wish to hold the extra money in idle money balances; i.e., if they were in equilibrium before the increase, they were already holding money balances to suit their requirements, and thus after the increase they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. Thus Friedman challenged the Keynesian assertion that 'money does not matter'; he argued that the supply of money does affect the amount of spending in an economy. Thus the word 'monetarist' was coined.
The rise of the popularity of monetarism in political circles accelerated as Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemploymentIn economics, a person who is able and willing to work yet is unable to find a paying job is considered unemployed . The unemployment rate measures the number of unemployed workers as a proportion of the total civilian labor force, where the latter includ and inflation in response to the collapse of the Bretton Woods Conference in 1972 and the oil shocks of 1973. On the one hand, higher unemployment seemed to call for Keynesian reflation , but on the other hand rising inflation seemed to call for Keynesian deflation. The result was a significant disillusionment with Keynesian demand management: a Democratic President James Earl Carter appointed a monetarist Federal Reserve chief Paul Volcker who made inflation fighting his primary objective, and restricted M1 to tame inflation in the economy. The result was the most severe recession of the post-war period, but also the creation of the desired price stability.
Monetarists not only sought to explain contemporary problems; they also interpreted historical ones. Milton Friedman and Anna Schwartz in their book A Monetary History of the United States, 1867-1960 argued that the Great Depression of 1930 was caused by a massive contraction of the money supply and not by the lack of investment Keynes had argued. They also maintained that post-war inflation was caused by an over-expansion of the money supply. They coined the famous assertion of monetarism that 'inflation is always and everywhere a monetary phenomenon'. At first, to many economists whose perceptions had been set by Keynesian ideas, it seem that the Keynesian vs. monetarist debate was merely about whether fiscal or monetary policy was the more effective tool of demand management. By the mid-1970s, however, the debate had moved on to more profound matters as monetarists presented a more fundamental challenge to Keynesian orthodoxy.
Many monetarists sought to resurrect the pre-Keynesian view that market economies are inherently stable in the absence of major unexpected fluctuations in the money supply. Because of this belief in the stability of free market economies they asserted that active demand management (e.g. by the means of increasing government spending) is unnecessary and indeed likely to be harmful. The basis of this argument is an equilibrium between "stimulus" fiscal spending and future interest rates. In effect, Friedman's model argues that current fiscal spending creates as much of a drag on the economy by increased interest rates as it creates present consumption: that it has no real effect on total demand, merely that of shifting demand from the investment sector (I) to the consumer sector (C).
| Politics | Business | Finance |
 |
 |
 |
|