Monetarism: Milton Friedman
Monetarism is one of the most influential trends in modern economic science, pertaining to the neoclassical direction. He considers the phenomena of economic life mainly from the perspective of the processes occurring in the sphere of monetary circulation. The term “monetarism” was introduced into contemporary literature by Karl Brunner in 1968. It is commonly used to characterize the School of Economics (predominantly Chicago), which states that aggregate monetary income has a primary influence on the change in money supply.
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Initially, monetarism was identified with anti-Keynesianism, as evidenced by the title of some works by prominent representatives of the coinage theory (G. Johnson’s book The Keynesian Revolution and Monetarist Counter-Revolution). Simultaneously with the criticism of the Keynesian macroeconomic theory and economic policy, the leader of monetarists Milton Friedman (born 1912) and his supporters developed a monetary theory of determining the level of national income and the theory of the cycle.
The ensuing increase in the influence and popularity of monetarism, especially in the United States and the United Kingdom, where it was accepted as the basic theory in the development of economic policy, is related to the aggravation of inflationary processes and their impact on the state of the economy.
For more than three decades of existence, monetarism expanded its influence and underwent certain changes. He began to claim the role of a universal economic doctrine capable of solving such economic problems as the efficiency of economic regulation, the role of the state in economic life, and the like. Monetarism is widely advocated by its representatives as a monetary policy, specifically aimed at controlling the growth of the money supply.
American economists of the 20-40s had a significant influence on the formation of the monetarist theory. G. Simons, I. Fisher, F. Knight, etc. They attached great importance to the sphere of monetary circulation, which was subsequently underestimated by the Keynesians.
That is why one of the merits of coin-earners is a number of Western researchers consider the “rehabilitation” of money in the system of economic categories. A certain respectability of monetarism is given by references to A. Smith and the founders of quantitative theory of money by D. Ricardo, D. Hume, R. Cantilon, and G. Torton.
Monetarism is based on a number of theoretical and methodological prerequisites: quantitative theory of money, the theory of A. Marshall’s relative price, theory of market equilibrium L. Walras, short-term variant of the concept of Phillips curves, Keynesian models of ISTD (investment – savings – labor – money), neoposit as a basis for the methodology of economic processes research.
In the late 60’s M. Friedman reformed the quantitative theory of money, based on existing developments (transactional variant and. Fisher, Cambridge version of cash balances, profitable variant. I. Fisher and K. Snyder). Its main idea is to recognize the direct impact of changes in money supply on price levels. According to Friedman, “money matters to price dynamics,” and, importantly, “it is the amount of money, not interest rates, that influences the state of the money market or the terms of lending.”
The monetarist variant of quantitative theory can be reduced to the following positions:
- Quantitative theory is first and foremost a theory of money demand; it is not a theory of production, monetary income, or price levels;
- For economic agents and property owners, money is a type of asset, a form of wealth ownership;
- The analysis of demand for money by economic agents is formally identical to the analysis of demand for consumer services.
Such an interpretation indicates that monetarists do not distinguish between money as capital and money as such. Capital is regarded as a collection of monetary assets.
In the monetarist version of quantitative theory of money, an important place is given to the expected changes in the price level as a factor acting on the size of cash reserves and other financial assets at the disposal of economic agents.
Based on their own version of quantitative theory, monetarists associate it with production. Since the dynamics of the money supply are of paramount importance for explaining the fluctuations of the production process, it is concluded that monetary policy is the most effective tool for regulating the economy.
One of the key provisions of monetarism, on the basis of which its representatives build their variant of explanation of the economic cycle, is that money plays an extremely important role in changing the real income, employment and the general level of prices. They argue that there is a relationship between the growth rate of the amount of money, the growth rate of nominal income, and with the rapid growth of money supply, the nominal up-stroke also rapidly increases, and vice versa.
The change in money supply has an impact on both the price level and the production volume (within a limited period). It follows that the monetarist variant of quantitative theory of money performs the function of managing monetary demand, and through it – economic processes. Based on the position of the extraordinary role of money and claiming that the capitalist economy is a stable system capable of achieving a state of equilibrium through self-regulation, monetarists build their economic cycle model, in which changes in the money supply play a decisive role.
The main elements of monetary theory of the economic cycle are the following: a modernized version of the quantitative theory of de-neg, the concept of nominal income, a transfer mechanism designed to illustrate the impact of money on economic processes.
As noted by T. Mayer and K. Bruner, in the model of the transmission mechanism, the prevailing role is played by “monetary forces”, they consider money and prices. The monetary system operates as follows. The magnitude of the demand for money is the result of the optimization of various alternative investments in capital and depends on the existing or expected relative prices of the various assets.
When the magnitude of marginal returns on all of the possible objects of capital investment becomes equal, then the optimum is reached. Where marginal returns are not equal, economic agents change the structure of their assets by increasing the proportion of assets that can generate high returns or by reducing less profitable investment items. Therefore, fluctuations in economic conditions lead to changes in relative prices, ie. the prices of goods considered in relation to the prices of other goods, and the benefits of investing capital in various assets.
The most important determinant of the demand for money in this scheme is considered to be the majority of nominal income, which in turn depends on the demand and supply of money. In order for the scheme to not be closed, it is suggested that the bulk of the money supply is determined outside the model (exogenously).
Based on one of the most important provisions of monetary theory of nominal income about the “complete and instantaneous adjustment of the estimated amount of money to the required”, and also using the neoclassical model of L. Waltz’s equilibrium, monetarists conclude that the value of nominal income depends on velocity circulation of money; driven by changes in the demand for money from a determined exogenous supply of money. On the basis of this, another conclusion is reached that the means of changing the money supply can achieve the desired change in nominal income.
Changes in the nominal amount of money set by the Federal Reserve, according to M. Friedman, has a significant effect on production volume and employment in the short term, and on prices – in the long term. In the book “The monetary system of the United States. 1867-1960 »M. Friedman and A. Schwartz note the high stability of the relationship between changes in money supply and cyclical fluctuations in economic activity.
Monetarist scheme of action of the “gear mechanism”, elements of which are day and prices, is described quite accurately by English economist P. Brownin. Based on the assumption that wages are determined by the ratio of supply and demand for labor in the market, economic agents, in order to influence the volume of production, adjust their demand for money to their supply.
The amount of income is also set according to the demand and supply of money. Employment is determined by the level of real wages and salaries, and the absolute level of prices does not depend on the money supply. Full employment in this scheme, notes P. Brownin, can be achieved only by reducing wages.
Therefore, all economic processes in monetarists are associated with fluctuations in the money supply. Any deviation in the volume of production from equilibrium in this scheme is eliminated by adjusting the demand for money and their supply, so the commitment of the monetarists to monetary regulation is obvious.
Researchers of monetary theory identify four major groups in it: the orthodox group, supporters of the concept of rational expectations, gradulists and pragmatists. The main thing that allows you to differentiate between them consists of three points: the degree of price elasticity; the essence of the operation of the transmission mechanism; the nature of rational expectations.
To Orthodox monetarists should be attributed M. Friedman and R. Sel-den to supporters of rational relations (right monetarists), who are the opponents of macroeconomic regulation, blaming all the problems of functioning on economic policy mistakes. The capitalist economy, by T. Sargent, R. Bacon, W. Eltis, and others.
The pragmatists, or leftist monetarists, led by D. Leider, occupy an intermediate position between the orthodox economists of the monetarist current and the Keynesians. Based on the requirements of the “monetary constitution”, they allow the use of government loans for deficit financing of the budget. The monetarist set of rules of state regulation is similar to a system of legislative acts that authorize or prohibit certain forms of economic policy; hence its name – “de-gentle constitution”.
According to the monetary constitution, the amount of monthly changes in the money supply should be equal to a predetermined annual growth rate of money supply, about 5% annually. According to mo-netarists, changes caused by other goals of the state or going beyond the agreed boundaries are completely unacceptable, since they inevitably lead to an increase in inflation and unemployment.
To substantiate their conclusions, monetarists make extensive use of economic-mathematical models that are not significantly different from Keynesian.
Monetarist principles of regulation of the economy along with the concept of the economic cycle are based on their theory of inflation and unemployment.
Taking inflation as a purely monetary phenomenon, monetarists believe that its development is based on changes in the correspondence between the money supply in circulation and the real need of the population for cash, ie. the ratio between the supply of money and the demand for it.
The monetary theory of inflation and unemployment and the related recomendations to regulate the economy were formed in response to Keynesian counterparts.
Monetarists criticized the concept of the Phillips curve, which substantiates the relationship between short-term and long-term changes in unemployment and inflation, the need for short-term regulation. They oppose this concept, recognizing only the short-term link between the unemployment rate and the rate of “unforeseen” inflation, which is the result of erroneous economic policies.
The need for short-term regulation is categorically negated. The Phillips curves, according to the monetarists, do not reflect the stable relationship and quantitative correlation between changes in unemployment and prices over a long period or in high inflation. Therefore, this concept cannot be used by the state as an effective tool for forecasting and regulating the rate of inflationary price growth.
Monetarists, in their concept of inflation, distinguish between expected and unanticipated inflation. The first assumes a long-term rate of growth of prices, which corresponds to the rational expectations of the agents of the economic system with respect to changes in prices. Rational expectation refers to individual long-term forecasts of price dynamics, which are used to make market decisions about the magnitude of factors of production. In this case, the rationalism of inflation expectations lies in their adequacy to the rational behavior of the economic individual in the market.
As a result of the effect of the expected inflation factor, according to the coins, the inflation process will always significantly exceed the rate that should follow from the concept of Phillips. Thus, as soon as the government tries to raise the employment rate and the unemployment rate falls below the “natural” norm, the expected inflation will be imposed on real rates of price growth, as a result of which inflation will increase sharply.
Monetarists assume that employment is only linked to short-term unforeseen inflation because it diverts unemployment from natural. She considers the unforeseen inflation a consequence of the erroneous activities of governmental bodies. The content of the monetarist concept of the natural level of unemployment is that the conditions of equilibrium maintain a stable and optimum for the economy natural level of unemployment.
According to the widely known monetarists M. Friedman, T. Sargent, and R. Lux, Jr., natural unemployment is not dependent on macroeconomic factors and is determined only by microeconomic factors. They believe that the reduction of the natural level of unemployment through government regulation can only be reduced by spending on social programs and tight fiscal policies. Other government measures to regulate employment – setting minimum wage rates – inevitably contribute to rising inflation.
The monetary theory of unemployment, which negates the regulating effects on employment of macroeconomic factors, also refutes them. Being a product of capitalist accumulation, a condition for the development of a market economy.
Monetary explanations for the causes of inflation by monetary factors alone and government regulation of employment are inconsistent with reality. Inflation is generated by the state-monopoly structure, the elements of which are the hidden form of capital overflow, the growth of government expenditures and the formation of chronic deficits of the state budgets, the rise of the national debt and the inflationary methods of covering it, excessive credit expansion of commercial banks. , foreign economic policy. All this rather complex mechanism of modern capitalism, by its operation, generates and deepens inflation.
On the basis of the theory of inflation and unemployment, monetarists recommend to the state a whole set of regulatory measures: reduction of state expenditures by reducing social programs, expenditures on payments of various kinds of benefits; maintaining minimum wage rates; weakening the influence of trade unions; conducting monetary policy based on monetary constitution; adaptation of the tax system to anti-inflation policy (tax cuts); providing the Federal Reserve with stable monetary growth; reducing the growth of the federal budget deficit, including at the expense of defense spending.
The monetarist program of state regulation has found a wide response among the governments of capitalist countries, in particular in the United States, Great Britain, and more recently in Germany.
The application of the recommendations of the monetarists did not produce tangible results and caused serious criticism from economists. So J.K. Galbraith, as a result of an analysis of the economic policy of the US administration, raised serious doubts about its ultimate effect, because, as he put it, “both monetarists and theorists of the concept of ‘supply’ offer a classic market that does not exist now.”
Monetarists have taken a certain step in the study of the economic mechanism of modern capitalism, in the study of the functional connections of the capitalist economy, the factors influencing the dynamics of inflation and unemployment. To some extent, their concept has had a positive impact on the development of anti-inflation measures in the United States and England in the 1980s. The monetarist assessment of the negative manifestations of the Keynesian theory of state regulation in the part of scarce financing, excessive release of money into circulation is of note.
However, monetarists are typical representatives of the exchange concept. They see the root cause of economic processes not in production but in circulation. Monetarists are unable to explain the internal content, origins of the considered tendencies of the classical economy. Relying on empiricism, they recommend that the size of the money supply approximate the growth rate of output.
The question of how the factor influences the dynamics and results of production is essentially silent, since the authors of the concept cannot answer it. References to many years of experience, statistics from the history of monetary circulation are perceived by many as skeptical.