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Why Monetarism Failed


DP Veteran
Sep 26, 2015
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The United States
Political Leaning
Now I'm wondering if anyone on here will argue that Monetarism is a good thing..
Brad DeLong asks why monetarism — broadly defined as the view that monetary policy can and should be used to stabilize economies — has more or less disappeared from the scene, both intellectually and politically. As it happens, I wrote about essentially the same question back in 2010, inspired by the more or less hysterical pushback against quantitative easing. I thought then and think now that this was fated to happen, that Milton Friedman’s project was always doomed to failure.

Economists were urged to build everything from “micro foundations” — which was taken to mean perfect rationality and clearing markets, not realistic descriptions of individual behavior.

But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust.

Inevitably the drive for purism collided with the realistic accommodations, the ad hockery, needed to be useful; sure enough, half the macroeconomics profession basically said, “what are you going to believe, our models or your lying eyes?” and abandoned any good sense Friedman had originally brought to the subject.

Right-wingers insisted — Friedman taught them to insist — that government intervention was always bad, always made things worse.

Monetarism added the clause, “except for monetary expansion to fight recessions.” Sooner or later gold bugs and Austrians, with their pure message, were going to write that escape clause out of the acceptable doctrine. So we have the most likely non-Trump GOP nominee calling for a gold standard, and the chairman of Ways and Means demanding that the Fed abandon its concerns about unemployment and focus only on controlling the never-materializing threat of inflation.

What about the reformicons, who pushed for neo-monetarism? We can sum up their fate in two words: Marco Rubio.

The point is that the monetarist idea no longer serves any useful purpose, intellectually or politically.
Anyone that thinks monetarism has no explanatory power is rather as odd as those that thought it contradicted or even falsified Keynes.

Who said it doesn't have any "explanatory power?" Monetary policy can be useful, but fiscal policy takes the cake.

Friedman taught them to insist — that government intervention was always bad, always made things worse[/url]

Frankly, I don't think Friedman taught them something that is intrinsic to the Business World. A businessman or woman is born with an instinct that they have the right to pursue customers without constraint. Nice thought, but it aint necessarily true.

Factually, monetaris is part myth, part truth. The truth part being that a market-economy has rules and when one is hell-bent to make a lotta muney, they don't like rules.

Rules are there nonetheless for a reason. Which economists often call a "level playing field", and which means that a market-economy must be competitive. That is, open to both New Entry and also Exit. A market-economy renews itself. Except, of course, when markets stagnate due to insufficient competition. Which is often, because we have allowed (this past half century) for far too much Market Consolidation. Bu means of buy-outs and corporate consolidations. A playing field went from dozens to just three in a matter of a decade.

And Example: I recall that the Information Technology market was once called "IBM and the Seven Dwarfs". That is, IBM plus Burroughs, Sperry Rand (formerly Remington Rand), Control Data, Honeywell, General Electric, RCA and NCR. Today, not even IBM sells more software services than mainframes because the IT-market morphed with the advent of the Internet.

Thus a key intrinsic attribute of markets is that they "morph", meaning that - with the hectic advance of technologies - markets become "old" quicker than in the past. In fact, some open-and-close (with a profit) in a period of six-months to a year. Why? Because of the Internet, where Customer Acquisition is much, much quicker than in the past - when a company needed years to obtain suitable recognition in the marketplace by customers. And with the rampant birth of new Internet-technologies, "out-of-date" products or services happen much, much quicker than before.

Monetarism, per se, is simply controlling the Supply of Money, based upon the assumption that the more money that is available, the more will Customer Propensity to Spend be enhanced. Frankly, that definition should never have convinced anyone with at EC101 course under their belt.

After all, the Heart of any market is, precisely, Customer Propensity to Spend. If they have neither the means nor the money, their "propensity" is close to zero. So, what makes for said Propensity to Spend to accrue and motivate consumption?

Unfortunately Economics Books don't spend much time on the subject, because Economic Science treats propensity as a "given". Which is part right, and mostly wrong.

In this last Great Recession we were reminded that, though 10% of the population was unemployed and thus disinclined to spend on whatever money UI was affording them, they cut back sharply on spending.

So, clearly, an important criteria, and far-more important than the Supply of Money was Consumer Psychology - which, frankly, does not enter much into the realm of Economic Sciences.

And it should, because it is the foundation stone of the Art of Economics. That is, the reasons why people spend and stop spending, and all the points in between ...
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