Keynesians against the Monetarists - Assignment Example

Outline I. Introduction The basics of the Keynesian theory Keynesian in the face of a Great Depression Aggregate demand distress The Monetarists counteract The lasting contribution of the Monetarist Counter-Revolution A. The Contemporary Relevance of the Keynesian Economics B. The Monetarist Counter-Revolution in the Modern Times C. Friedman’s Monetary Theory Keynesians against the Monetarists Name: Date of Submission Martine H. Saboo Macroeconomics 202-002 Abstract The discipline of macroeconomics will never be complete without the discussion of the fundamental foundations of economic analysis which are Keynesian and the Monetarist. In this paper, the two opposing economic frameworks will be discussed. Moreover, their relative importance on the past and present economic conditions will also be explored. The importance of the debate in macroeconomics has been the opportunity given to the economists to synthesize the two most dominant attributes of the economy, one according to Keynesian and the other as claimed by the Monetarists. I. Introduction Few economists would argue that the birth of modern macroeconomics can be dated back to the upsetting incidents of the 1930s and most particularly the perspectives of John Maynard Keynes (1936) conveyed in the General Theory of Employment, Interest and Money which is basically a response to these traumatic events. Prior to the Keynesian revolution the prevailing classical assumption was that while consumerist economies would be subjected to episodic distresses, market forces would function promptly and successfully to restore complete employment equilibrium (Ahiakpor 2003). In such conditions government intervention to calm down the economy was judged to be neither essential nor favorable. The Great Depression, which bears witness to a terrible collapse in output and increase in unemployment rate, seemed to blow apart the classical theory that complete employment was the normal state of affairs (ibid). Writing in this setting, Keynes argued that capitalist market economies are intrinsically unstable and can only be stabilized at less than complete employment for protracted periods. This insecurity was for Keynes largely the consequence of fluctuations in collective demand. The Great Depression, he disputed, resulted above all from a razor-sharp reduction in the level of investment expenditure “occasioned by a cyclical change in the marginal efficiency of capital” (Snowdon & Vane 1999: 2) with the related harsh uncontrolled unemployment illustrating a state of scarce aggregate demand. The indication of Keyne’s analysis was that government intervention, in the structure of flexible fiscal and monetary policy, could assist improve such aggregate insecurity and even out the economy at full employment mode. Capitalism could be resurrected but not in accordance to the nineteenth-century laissez-faire belief (ibid). The immediate acceptance of Keynesian in the intellectual community and policy-making societies guaranteed that throughout the 1950s and 1960s it was to develop into a traditional knowledge. The dogmatic Keynesian framework itself is founded on the perceived necessity for advanced aggregate demand management strategies to even out the economy. Orthodox Keynesian dispute that capitalist economies usually is deficient in stability and that, when abandoned to their own mechanism, will not quickly self-balance after being subjected to a number of disruptions, the primary source of which is ascribed to aggregate demand distresses. Provided with these assumptions, they emphasize the requirement for dynamic interventionist approaches and claim that the officials or authorities can and hence should maximize discretionary aggregate demand management strategies to alleviate the economy (Snowdown & Vane 1997). Undeniably, in the 1950s and 1960s several Western administrations exerted efforts to polish up their economies with the intent to stabilize production and employment, almost exceptionally through discretionary demand aggregate management strategies (ibid). At some stage in the late 1960s and early 1970s a monetarist counterattack transpired and interest started to deviate away from aggregate demand management towards aggregate supply management. Contrary to the accepted Keynesian framework, mainstream monetarist argue that capitalist economies are intrinsically established, unless disrupted by inconsistent monetary growth, and that if subjected to a number of interruptions will go back quickly to the zone of long-run symmetry at the natural tempo of unemployment (Nishimura 1992). The concept of the natural rate hypothesis is initially applied to unemployment in 1966 by Friedman yet later popularized in his renowned 1968 work. Basically, the natural rate hypothesis “is the belief in an equilibrium rate of unemployment determined by the structure of the real side of the economy and the institutions of the labor market” (Friedman 1966: 58). If governments aspire to reduce the natural rate in order to obtain improved employment levels they should carry out aggregate supply management strategies developer to enhance the organization and operation of the labor market and commerce. Provided with the perspective that the economy will impartially swiftly self-balance along the natural rate of production and employment once being subjected to a number of interruptions, conventional monetarists question the necessity of an advanced stabilization policy. Moreover, while tolerating that fiscal policy can impact production and employment temporarily, it is proposed that in the long run fiscal growth will simply reinstate or overwhelm some sections of private sector spending so that actual income lingers unaffected at its natural level (ibid). In retrospect, possibly the primary importance and enduring contribution of the monetarist counter-revolution has been to convince a major and leading number of economists to acknowledge the suggestion that the stabilizing prospective of advanced discretionary fiscal and monetary policy is optimally limited. Friedman’s manifold contributions have been greatly powerful in demoting economists’ confidence in the capability of government to realize favorable intentions with regard to production and employment through capitalizing on interventionist techniques based on advanced demand management strategies (Ahiakpor 2003). In Friedman’s framework, the concern that actually detaches economists “is not whether they regonize market failure, but how much importance they attach to government failure” (Snowdon & Vane 1999: 4), and he has significantly less conviction than majority of the economists, whether Keynesians or monetarist, in the capacity of government to counterbalance market breakdown without making things more depressing. In retrospect, it can be said that Friedman’s 1967 presidential speech to the American Economic Association, published in the title of The Role of Monetary Policy (1968), has absolutely been his most influential and convincing article. Robert Gordon, in 1981, applauded Friedman’s work as perhaps the most persuasive article written in macroeconomics in the preceding two decades, whereas Krugman (1994) describes it as “one of the decisive intellectual achievements of post-war economics” (48). A. The Contemporary Relevance of Keynesian Economics The previous decades have witnessed major changes within the economic discipline. This is particularly correct of macroeconomics. During the 1970s, the primary concern in macroeconomics was the debate between Keynesians and Monetarists. At the advent of the twenty first century macroeconomic framework starts with the contributions of the latest classical economists, who accept as true that markets are stable and endorse permanent growth, and that microeconomic fundamentals must give details on macroeconomic outcomes. This has had a number of important results (Snowdon & Vane 1997). With the progress in rational expectations, several economists at present believe that economic policies have insignificant or no influence on actual productivity, hence admitting laissez-faire as the policy remedy of choice. They also embrace that capitalist economies, motivated by the rationality of their major economic actors, will be predisposed to achieve full employment of all available resources, as well as labor (ibid). Moreover, significant changes have transpired within the contemporary Keynesian paradigm itself. Numerous key concepts have been both extended and improved. Modern Keynesians have examined the pricing decision of companies more cautiously; and they have developed their investigation of unemployment, price increases, income allocation and insecurity (Ahiakpor 2003). B. The Monetarist Counter-Revolution in the Modern Times Many, probably most, economists deemed that monetarism is gone. With its brilliance pilfered by new classical theory and its practical foundation ruined by the dissolution of steady money-demand function, they then perceive it as a blind alley in the chronology of economics. Initially, the proof for the downfall of monetarism seems devastating. Few scholarly works on monetarism now emerge in the professional journals, and monetarism has been abandoned as a popular subject matter for conferences. Likewise astonishing is that in the present-day few, if any, of those beginning on their profession as economists, proclaim themselves to be monetarists. Economists who refer to themselves monetarists are almost all from the senior generation and several are near to the final phase of their careers (Snowdon & Vane 1999). The truth behind the sudden collapse of the monetarist counter-revolution is that much of temperate monetarist doctrine has been integrated into the majority, and thus is no longer attributed to monetarism. Therefore, if Keynesian theory is endorsed with triumph, it is in excellent part due to its flexibility, eager to assimilate the best that the adversary had to offer (ibid). C. Friedman’s Monetary Theory There are actually two primary versions of monetarist theory. The one that is more popularly known is Friedmanian version which is a revised structure of the conventional quantity theory, in which alterations in nominal income are clarified by changes in the supply and demand curve for money. This edition of the quantity theory, dissimilar to the outdated version, does not consider the demand for money to be numerically secure. Instead, it recognizes the demand for money to be an established function of a narrow number of knowable variables, such as “real income or wealth and the opportunity cost of holding money” (Snowdon & Vane 1999: 79). Friedman then included to this money-demand function the assumption that the observed fluctuations in nominal income are due primarily to alterations in the supply of nominal money, not to changes in demand. This is, to say, an empirical assertion whose soundness relies, in part, on the extent of the variability of the money supply in a particular economy (Friedman 1968). Therefore, one can assume that Friedman’s monetary model is a particular case in Keynesian theory. Works Cited Ahiakpor, James C.W. Classical Macroeconomics: Some Modern Variations and Distortions. New York: Routledge, 2003. Friedman, Milton. "The Role of Monetary Policy." American Economic Review (1968): 58. ----. "What Price Guideposts? Comments." Schultz, George P. Informal Controls and the Market Place: Policy Choice in a Full Employment Economy. Chicago, IL: University of Chicago Press, 1966. Keynes, John Maynard. The General Theory of Employment, Interest and Money. London: MacMillan, 1936. Krugman, Paul. Peddling Prosperity. New York: W.W. Norton, 1994. Nishimura, Kiyohiko. Imperfect Competition, Differential Information and Microfoundations of Macroeconomics. Oxford: University of Oxford, 1992. Snowdon, Brian & Vane, Howard. A Macroeconomics Reader. London: Routledge, 1997. —. Reflections on the Development of Moden Macroeconomics. Cheltenham, England: Edward Elgar, 1999. Read More