For those who don’t have time to watch this link, I’ll provide a summary, it makes the premise that the market can only be regulated and not manipulated to suit a governments strategy unless they accept the negative consequences of that implementation, but what struck me about the documentary was the scathing attack on the monetarist platform which was the lynchpin of the Thatcher government in her first term as PM.
Ignorance on my part, but I had been lead to believe that Monetarism was part of the free market mantra espoused by Milton Friedman, and that it worked. If this documentary is right, then why did he get a Nobel Prize in economics, when his theory was a dismal failure in the US and UK?
However on the flip side, the UK and the US brought down inflation from double digits to single figures, considering controlling the money supply is supposed to bring this down and inflation went down, what happened?
it makes the premise that the market can only be regulated and not manipulated to suit a governments strategy
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I have not watched the video, but it seems to me that regulation is a subset of manipulation, so a statement that says you can’t manipulate but you can regulate is nonsensical.
And unemployment went through the roof and stayed there.
If Friedmanism deserves credit for lowering inflation (I don’t know if it really does, but if) it very probably also deserves the blame for years of austerity and high unemployment. Which is more important, I wonder.
If the OP has a specific question about monetary policy, I can try to help, but if you want to use the online learning route for broadening your horizons, please at least have the sense to go to a reliable source like Khan academy - as one example. Yes, we’re talking a much bigger investment of time but I guess the question is, do you actually want to learn something or just have people feed you bullshit?
That is entirely dependent on the amount of unemployment and inflation. A situation for instance with Weimar-level inflation and 6 percent unemployment is probably less preferable than a situation where unemployment is a half percentage point higher but inflation is at a healthy rate.
The US fed is unique in targeting unemployment - at least officially. As a general rule, central banks are charged with creating a stable currency and financial system.
If I understand Krugman correctly, he doesn’t reject monetarism. It is the first thing to try in general. The problem we have now is that it hasn’t done the job.
Fiscal policy relies on monetary principles - FYI. Money spent by the govt has a multiplier effect in much the same way as money that the central bank creates either directly through open market operations (buying securities) or indirectly by making credit easier to get.
Textbook economics posits 2 methods of aggregate demand stabilization: they are monetary policy (conducted by the Central Bank - in the US the Federal Reserve) and fiscal policy (adjustments to taxes and governmental spending). They both have their pluses and minuses.
Monetarism is the theory about the best method of conducting monetary policy. It was advocated by Milton Friedman, but has fallen out of favor even among conservative economists. It fell victim to Goodhart’s Rule: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
Milton Friedman was an excellent economist who got a lot right. But he got some things wrong as well, and monetarism was one of them.
Where are you getting your definition of monetarism?
Uncle Milty may have gotten some things wrong, but considering the fact that he basically created monetary theory, I think you have to cut the boy some slack.
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I didn’t define monetarism. I merely said it was a theory about the best method of conducting monetary policy.*
As I said, Friedman was an excellent economist, but the idea that growing the money supply at a constant rate was the best way to promote economic stability was never that well grounded and has been mostly discarded. Neo-monetarists prefer things like Taylor Rules nowadays.
I don’t have a problem with what delta quoted.
Since I have the mike, I’ll talk a little about Margaret Thatcher. She had an inflation problem and was a believer in monetarism. Monetarists believed that if the Central Bank made a credible commitment to a certain growth rate in the money supply that markets would seemlessly adjust to the new reality and you could get a big drop in inflation without recession. Now it’s true that tighter monetary policy will indeed lower inflation. But the rest of the conjecture didn’t pan out.
Volker tried the same thing: the difference was he was a pragmatist. So when there were early signs that monetary velocity had moved in unpredicted ways, he was ready to reassess the evidence and reverse course. There’s something to be said for interpreting economics as a discipline, not a religion.
No. I actually said it was THE theory about the best method of conducting monetary policy. That was a typo, though not owing to poor dexterity of course.
One of the things that early monetarism didn’t account for was psychology, specifically, inflationary expectations. I think it treated it as a purely mathematical problem - which is still a problem with economic theory.
One of the strengths of the current fed chairman is his appreciation for and ability to manage expectations. One of the things this fed has done with the care of a priest at high mass is to give the most accurate and honest forward guidance to the markets possible - even if, as we’ve recently seen, that happens to be to tell them that well, we might have to flip a coin.
Didn’t we go from the ‘Phillips curve’ to the ‘expectations augmented Phillips curve’ somewhere in the 90s? Hardly specific to the ‘current’ FED, or did the FED refrain from taking economists into account for 20 years?
My, my. I see someone knows a little macro jargon. I suppose you’re also under the impression that the entirety of the field of economics is summed up by the concept of a Phillips curve.
Saying that monetarism was discredited is like saying heliocentrism was discredited because planets move in ovals and not in circles around the sun. New monetary theories account for more than just quantity of money, they also take into account such things as velocity and types of money. However, that is just a refinement of monetarism not a refutation. No one is going back to the push pull theories of inflation. Before Friedman’s theory triumphed we had a US president who thought you could fight inflation by handing out buttons.
No body thought you could fight inflation without a recession. During the 1970s it was thought that inflation was a democratic disease. That you had to have ever rising inflation to keep employment up, since people were always adjusting to the new inflation levels. Democracies could not tame inflation since doing so meant unemployment and a recession. Thus inflation was permanent and could only be solved in a huge crisis. Thatcher and Reagan were two leaders who were willing to take the heat for the recession. There has been no significant inflation since while both economies had done very well into the last recession. The UK had less GDP per capita than Japan, France, and Italy when Thatcher took over. The economic growth of the UK has been the best in europe since then. There was a huge price to pay for getting inflation under control in 1981 but the alternative was more stagflation and an even larger crash went inflation was finally controlled.
Friedman was probably the greatest economist of the last century. Most nobel award winning economist are like honeybees in that they sting once and then die. Freidman did more important work after he won the Nobel award than most of the other winners did before they won the prize. Bernanke is a committed monetarist and learned so much from Friedman. That is how he was able to rescue the economy from a second great depression. Here is a speech where Bernanke talks about Friedman’s influence " Among economic scholars, Friedman has no peer. "
