Keynes versus the monetarists 1
A Quick Guide to Keynes and the monetarists Dec 2, 2005
Keynes:
1. Rejects Say's law of markets that supply creates its own demand. He also doesn't accept Walras's law that says non zero supplies are matched precisely by non zero demands for goods and services. He doesn't believe that the invisible auctioneer eventually clears the market place of gluts.
2. Believes that money is not neutral. In other words once we introduce money into a barter system something significant changes and gluts become possible.
3. Labour markets do not always clear because of uncertainty, disproportionalities; non-homogeous supplies of labour and the importance of aggregate effective demand for clearing the market.
4. Persistent unemployment is possible despite flexible labour markets.Keynes rejects the second classical postulate that the wage is equal to the marginal disutility of labour. Involuntary unemployment is possible.
5. Keynes rejects the quantity theory of money.
6. Interest rates are not determined by the demand and supply of loanable funds. Rather liquidity preference plays a major role . The central bank's behaviour is also very important in establishing short and medium term rates.
7.Keynes has a sophisticated theory of inflation prior to full employment based on profit push, wage push and savings investment disproportionalities.He elaborates this theory in the Treatise on Money (1930) but refines it and includes it in the Chapter on prices in the General Theory (1936)
8. The decision to invest and the decision to save are separate decisions often taken by very different people. Savings are not automatically and frictionlessly translated into investments.
9. Believes that both monetary and fiscal policy are important. The scissors effect is operational. One needs an accomodating monetary policy for a stimulative fiscal policy.
10. Deficits are a useful and appropriate tool of fiscal policy to help push an economy out of a slump.There is a multiplier effect on increments in investment. Leakages may exist but their impact is not large enough to overwhelm the multiplier.
11. When one stimulates most of the vector forces are on output but some is on prices. As one approaches lower unemployment more of the vector forces transfer from output to prices.GDP consists of PxO. Hence dI leads to dP as well as dO.
The monetarists:
1.They accept Say's law. They accept Walras's law.(For a more subtle and somewhat dissenting view of this description of the classical school as a caricature see David Laidler Fabricating the Keynesian Revolution. But also see the work of John Hotson, Paul Davidson,Alan Meltzer,R.Clower, Joe Stiglitz,Joan Robinson, , Axel Leijonhufvud, J.A.Trevithick,Harold Chorney and a number of other writers on these questions.)
2. They believe in the loanable funds doctrine for interest rate determination.
3. They privilege monetary policy above fiscal policy. A stable predictable steady growth in the money stock is desirable.
4. Savings are extremely important and automatically beget investment.
5. The quantity theory of money is sound.
6. Labour markets like other markets will clear so long as there are no frictions preventing this. Typical frictions are labour unions, the excessive social wages of the welfare state, inadequate or inefficient job search. Unemployment is therefore voluntary.
7. Laissez-faire is best. Intervention should be minimal. Allow the natural forces of the market to operate and all will be well.
8. Deficits are bad because they facilitate the growth of government which is bad.
9. Uncertainty is not a problem.
10. Inflation is the problem. Unemployment is taken care of by the natural rate approach. It is almost always voluntary.
Keynes:
1. Rejects Say's law of markets that supply creates its own demand. He also doesn't accept Walras's law that says non zero supplies are matched precisely by non zero demands for goods and services. He doesn't believe that the invisible auctioneer eventually clears the market place of gluts.
2. Believes that money is not neutral. In other words once we introduce money into a barter system something significant changes and gluts become possible.
3. Labour markets do not always clear because of uncertainty, disproportionalities; non-homogeous supplies of labour and the importance of aggregate effective demand for clearing the market.
4. Persistent unemployment is possible despite flexible labour markets.Keynes rejects the second classical postulate that the wage is equal to the marginal disutility of labour. Involuntary unemployment is possible.
5. Keynes rejects the quantity theory of money.
6. Interest rates are not determined by the demand and supply of loanable funds. Rather liquidity preference plays a major role . The central bank's behaviour is also very important in establishing short and medium term rates.
7.Keynes has a sophisticated theory of inflation prior to full employment based on profit push, wage push and savings investment disproportionalities.He elaborates this theory in the Treatise on Money (1930) but refines it and includes it in the Chapter on prices in the General Theory (1936)
8. The decision to invest and the decision to save are separate decisions often taken by very different people. Savings are not automatically and frictionlessly translated into investments.
9. Believes that both monetary and fiscal policy are important. The scissors effect is operational. One needs an accomodating monetary policy for a stimulative fiscal policy.
10. Deficits are a useful and appropriate tool of fiscal policy to help push an economy out of a slump.There is a multiplier effect on increments in investment. Leakages may exist but their impact is not large enough to overwhelm the multiplier.
11. When one stimulates most of the vector forces are on output but some is on prices. As one approaches lower unemployment more of the vector forces transfer from output to prices.GDP consists of PxO. Hence dI leads to dP as well as dO.
The monetarists:
1.They accept Say's law. They accept Walras's law.(For a more subtle and somewhat dissenting view of this description of the classical school as a caricature see David Laidler Fabricating the Keynesian Revolution. But also see the work of John Hotson, Paul Davidson,Alan Meltzer,R.Clower, Joe Stiglitz,Joan Robinson, , Axel Leijonhufvud, J.A.Trevithick,Harold Chorney and a number of other writers on these questions.)
2. They believe in the loanable funds doctrine for interest rate determination.
3. They privilege monetary policy above fiscal policy. A stable predictable steady growth in the money stock is desirable.
4. Savings are extremely important and automatically beget investment.
5. The quantity theory of money is sound.
6. Labour markets like other markets will clear so long as there are no frictions preventing this. Typical frictions are labour unions, the excessive social wages of the welfare state, inadequate or inefficient job search. Unemployment is therefore voluntary.
7. Laissez-faire is best. Intervention should be minimal. Allow the natural forces of the market to operate and all will be well.
8. Deficits are bad because they facilitate the growth of government which is bad.
9. Uncertainty is not a problem.
10. Inflation is the problem. Unemployment is taken care of by the natural rate approach. It is almost always voluntary.
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