Keynesian Economics vs. Monetarism: What’s the Difference?
Keynesian Economics vs. Monetarism: An Overview
Monetarist economics referst to Milton Friedman’s direct criticism of the Keynesian economics theory formulated by John Maynard Keynes. Simply put, the difference between these theories is that monetarist economics involves the control of money in the economy, while Keynesian economics involves government expenditures. Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself. In contrast, Keynesian economists believe that a troubled economy continues in a downward spiral unless an intervention drives consumers to buy more goods and services.
Both of these macroeconomic theories directly impact the way lawmakers create fiscal and monetary policies. If both types of economists were equated to motorists, monetarists would be most concerned with adding gasoline to their tanks, while Keynesians would be most concerned with keeping their motors running.
- Monetarism focuses on controlling the money supply to control the economy.
- Keynesianism focuses on government spending to control the economy.
- Monetarists believe in fighting inflation by adjusting the amount of money in circulation.
- Keynesians acknowledge some value in monetarism’s effect on GDP but feel that monetary adjustments take too long to be felt.
- Both economic theories are used by lawmakers to create fiscal and monetary policies.
The terminology of demand-side economics is synonymous with Keynesian economics. Keynesian economists believe the economy is best controlled by manipulating the demand for goods and services. However, these economists do not completely disregard the role the money supply has in the economy and its effect on the gross domestic product (GDP). Yet, they do believe it takes a great amount of time for the economic market to adjust to any monetary influence.
Keynesian economists believe in consumption, government expenditures and net exports to change the state of the economy. Fans of this theory may also enjoy the New Keynesian economic theory, which expands upon this classical approach. The New Keynesian theory arrived in the 1980s and focuses on government intervention and the behavior of prices. Both theories are a reaction to depression economics.
Monetarists, as their name implies, are certain that the money supply is what controls the economy. They believe that controlling the supply of money directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future. Imagine adding more money to the current economy and the effects it would have on business expectations and the production of goods. Now imagine taking money away from the economy. What happens to supply and demand?
Monetarist economics founder Milton Friedman believed the monetary policy was so incredibly crucial to a healthy economy that he publicly blamed the Federal Reserve for causing the Great Depression. He implied it is up to the Federal Reserve to regulate the economy.
|Control of Economy||Government should intervene to manipulate demand for goods and services||Money in circulation should be regulated by the Federal Reserve|
|Inflation||Adjust government spending to adjust demand and control inflation||Control the money supply by increasing or decreasing it to control inflation|
|Unemployment||Emphasizes reducing unemployment more than reducing inflation; when people increase saving and reduce spending, the government may need to spend||Emphasizes reducing inflation more than keeping unemployment low; wages are likely to adjust naturally to prevent real wage unemployment|
|Views of Each Other||It takes too long for the economy to adjust to changes in monetary policies||Government spending causes rather than controls inflation and may crowd out spending by the private sector (which is preferred over public spending)|
Keynesian and Monetarist Examples in Politics
Presidents and lawmakers have applied multiple economic theories throughout history. During the Great Depression, President Herbert Hoover’s approach to balancing the budget, which entailed increasing taxes and spending cuts, failed. President Roosevelt followed next and focused his administration’s efforts on increasing demand and lowering unemployment. It is worth noting that Roosevelt’s New Deal and other policies increased the supply of money in the economy.
The 2007-08 financial crisis led President Obama and lawmakers to address economic problems by bailing out banks and fixing underwater mortgages for government-owned housing. In these instances, it appears elements of Keynesian and Monetarist theories were used to reduce the national debt.
How Are Keynesians and Monetarists Similar?
The theories of both affect the way U.S. government leaders develop and use fiscal and monetary policies. Keynesians do accept that the money supply has some role in the economy and on GDP. However, the sticking point for them is the time it can take for the economy to adjust to changes to it.
What Do Monetarists Believe to Be the Main Reason for Inflation?
Monetarists believe that government spending causes inflation. The level of the money supply, which they feel has a direct impact on inflation, must be used to control it.
What Are the Main Points of Keynesian Economics?
The main points are that the economy can be controlled best by a government that intervenes when necessary to manipulate demand (consumption). Governments should balance out the cyclical movement of the economy by spending more in downturns and less in prosperous times (thereby preventing inflation).