Monetarism
What are they key elements of Monetarism? Why did monetarist ideas become so influential during the 1970s (discuss with particular reference to the UK economy)?
“Inflation is always and everywhere a monetary phenomenon.”[1] Monetarism is an economic movement and school of thought focussing on the supply of and demand for money as the primary means of regulating economic activity. It rose to popularity in the 1970s along with the neo-liberal movement as a whole, when certain Governments adopted monetarism as their economic ideology around which policy was based; namely the United Kingdom under Thatcher and the ‘Reaganomics’ of the United States under president Ronald Reagan. The person who is most associated with this economic perspective is Milton Friedman, one of the most influential economists of the 20th century, who laid down the foundations and did the most influential work for this field of thinking; working closely with conservative governments that adopted his theories in practice through their economic policies. For this reason he is considered by some to be the ‘intellectual henchman of the right.’
With this label in mind, it seems most appropriate to look at Friedman’s work, being the foremost thinker and articulator of Monetarist thought, to gain a better understanding of this standpoint. Before its rise in popularity, Freidman began laying down the foundations for monetarist thought by revising and developing some previous theories, such as that of Keynes, as a means of creating a different way of viewing the macro-economy. His work on the ‘Permanent Income Hypothesis’[2] developed ideas on how people formed expectations of the future. Keynes had already thought and developed ideas on this issue in his ‘consumption function’, trying to understand how much of people’s income is saved and how much is consumed, and the balance between saving and investment. Freidman argued that Keynes had taken for granted that, “the current consumption expenditure,
“Inflation is always and everywhere a monetary phenomenon.”[1] Monetarism is an economic movement and school of thought focussing on the supply of and demand for money as the primary means of regulating economic activity. It rose to popularity in the 1970s along with the neo-liberal movement as a whole, when certain Governments adopted monetarism as their economic ideology around which policy was based; namely the United Kingdom under Thatcher and the ‘Reaganomics’ of the United States under president Ronald Reagan. The person who is most associated with this economic perspective is Milton Friedman, one of the most influential economists of the 20th century, who laid down the foundations and did the most influential work for this field of thinking; working closely with conservative governments that adopted his theories in practice through their economic policies. For this reason he is considered by some to be the ‘intellectual henchman of the right.’
With this label in mind, it seems most appropriate to look at Friedman’s work, being the foremost thinker and articulator of Monetarist thought, to gain a better understanding of this standpoint. Before its rise in popularity, Freidman began laying down the foundations for monetarist thought by revising and developing some previous theories, such as that of Keynes, as a means of creating a different way of viewing the macro-economy. His work on the ‘Permanent Income Hypothesis’[2] developed ideas on how people formed expectations of the future. Keynes had already thought and developed ideas on this issue in his ‘consumption function’, trying to understand how much of people’s income is saved and how much is consumed, and the balance between saving and investment. Freidman argued that Keynes had taken for granted that, “the current consumption expenditure,
Bibliography: Modern Macroeconomics: Its Origins, Development and Current State, B. Snowdon and Howard R. Vane, Edward Elgar Publishing Limited, 2005. M. Freidman, A Theory of the Consumption Function, Princeton University Press, 1957 M The General Theory of Employment, Interest, and Money, John M. Keynes, 1936. S. Marglin and J. Schor, The Golden Age of Capitalism: Reinterpreting the Post-war Experience, Oxford University Press, 1990 ----------------------- [1] M. Freidman and A. Schwartz, A Monetary History of the United States, 1867-1960, 1963. [2] M. Freidman, A Theory of the Consumption Function, Princeton University Press, 1957. [3] M. Freidman and A. Schwartz, A Monetary History of the United States, 1867-1960, 1963, pg 676. [4] B. Snowdon and H. Vane, Modern Macroeconomics: Its Origins, Development and Current State, 2005, pg 219. [5] S. Marglin and J. Schor, The Golden Age of Capitalism: Reinterpreting the Post-war Experience, 1990, pg 22.