Minisode #12: Monetarist Economics

Summary

Everybody has an opinion! In another episode of the Econ With Jac series, Jac covers Monetarist Economics: a direct criticism of Keynesian Economics.

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Transcription

Hi Everyone! Welcome back to another How Did We Not Know That minisode and more specifically an Econ With Jac episode!

In the last episode, we covered Keynesian Economics, and if you haven’t heard it yet go check it out because today we’re going to cover the exact opposite of Keynesian Economics, known as Monetarist Economics.

This theory was created as a direct criticism of the shortcomings of Keynesian Economics.

In 1945 an American economist known as Clark Warburton drafted the first argument in favor of monetarism, which is a theory in which the primary method of stabilizing the economy is done by controlling the supply of money.

This idea was later expanded on by Milton Friedman, another American economist, in 1956. This theory was developed after WW2 and Friedman believed so strongly in it that he publicly blamed the Federal Reserve for causing the Great Depression, as the Federal Reserve controls our money supply and it is their responsibility to regulate the economy 

The main idea of Monetarist Economics is that the best way to run an economy is to control the supply of money that flows into the economy, gradually increasing it over time and then allowing the rest of the market to fix itself.

In contrast, Keynesian Economics which was developed during the great depression argued that once an economy is in a recession or depression, it will continue to get worse unless outside intervention drives consumer demand to buy more goods and services.

So wait, doesn’t that mean that Monetarist and Keynesian Economics agree on expansionary monetary policy? i.e. adjusting the amount of money in circulation in the economy to drive demand?

Yes, they do! Although one was made in criticism of the other, the two theories aren’t mutually exclusive. The main difference is that Monetarists only believe in controlling the money supply and doing absolutely nothing else to influence the market, while Keynesian economics involves adjusting the money supply through influencing consumer demand with government expenditures

Long story short: Monetarists believe that money supply is what controls the economy while Keynesians believe that consumer demand controls the economy.

Controlling inflation is the most serious concern for Monetarists, as the greatest danger for the economy to them is when the money supply falls either too low or rises too high for the given economic environment. The goal is to keep inflation steady and adjust accordingly as the economy changes.

More money in the economy allows for more individual spending thus stimulating growth and increasing inflation, and if inflation gets too high, reducing the amount of money in circulation will lower individual spending as well as the rate of inflation.

A good way to remember Monetarists policy is that they center around money supply and their name practically has the word money in it

The main criticism today against this theory comes from the Austrian school of thought (which is another economic theory that I can cover in another episode), but they state that monetarism is too narrow-minded and it doesn’t take into account the subjectivity in valuing capital (in layman terms, how much individuals perceive the value of a dollar)

In addition to that, other criticism states that monetarism can have a negative impact on external economies. Due to the effects of globalization and the interdependence of markets. If you manipulate the money supply in one market, there will be unintentional relative effects on other currencies around the world. This is especially important with regards to the U.S. currency which is considered a standard in international markets.

All interesting points to consider when examining Monetarism! I’m going to wrap it up here, but now you have another economic theory to think about in your free time. Hope you enjoyed this episode and let us know what other economic concepts you’re interested in for a future episode! You can tweet us at HDWNKT or email us at howdidwenotknowthat@gmail.com

Thanks for listening! Bye!

Sources:

https://www.investopedia.com/ask/answers/012615/what-difference-between-keynesian-economics-and-monetarist-economics.asp#:~:text=Monetarist%20economics%20is%20Milton%20Friedman,Keynesian%20economics%20involves%20government%20expenditures.

https://www.economicshelp.org/blog/1113/concepts/keynesianism-vs-monetarism/

https://www.fool.com/knowledge-center/differences-between-monetarist-theory-and-keynesia.aspx

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