Theory Of Monetarism- facts show failure

[Peter1469]

Educated adults have seen Keynes' theories fail. Many clung to Milton Friedman when he offered an alternative view of political economy: monetarism- the use of monetary policy to keep the economy healthy.

A set of views based on the belief that inflation depends on how much money the government prints. It is closely associated with Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.

Thus, if inflation is kept low, the economy will grow.

But..., we see in the chart below that something else is at work. Italy and Germany are part of the Eurozone and governed by the same monetary policy. The EZ has low inflation. Yes Italy's unemployment is high and Germany's is low. So this is empirical evidence that the Chicago School is just as incorrect and the Keynesian School. My thoughts: both are heavy on mathematics. Economics cannot be reduced to mathematical formulas. We are dealing with human behavior. Some of the naysayers may decide to give the Austrian School another look....


Link

[Peter1469]

I also note that inflation is low in the US and our economy has signs of recovery. Yet compare that to Italy and explain the difference using Friedman.

[Chris]

I like Friedman for a lot of things but his advocacy of monetary policy was wrong.

[Peter1469]

I like Friedman for a lot of things but his advocacy of monetary policy was wrong.

He, I think, forgot that economics is really political economy. But then, so did almost everyone else.

[Chris]

That could be the problem though, that some think economics should be political. I think Friedman understood what many economists since Adam Smith have understood, that government intervention into the business cycle only distorts it and makes it worse.

[Peter1469]

That could be the problem though, that some think economics should be political. I think Friedman understood what many economists since Adam Smith have understood, that government intervention into the business cycle only distorts it and makes it worse.

I don't mean political economy in the sense that government intervention is needed. I mean it in a classical sense. Politics is the study of who gets what, when, where, and how. That can be with government or without. We can't use math while ignoring human nature in the field of economics.

[Chris]

I don't mean political economy in the sense that government intervention is needed. I mean it in a classical sense. Politics is the study of who gets what, when, where, and how. That can be with government or without. We can't use math while ignoring human nature in the field of economics.

Well, government shouldn't decide "who gets what, when, where, and how." Neither should economists. They can try to explain it, describe it, just not decide it.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." ~Friedrich August von Hayek

He had it right.

[Newpublius]

It's not the low inflation rate, inflation should be low to give people rational expectations about prices. This allows the economy to make fundamentally better decisions based on appropriate signals. The malaise in the Mediterranean world and really in the euro zone generally, Germany being the exception, is that fiscal policies make government action far too prominent for any healthy economy, the result, steady prices notwithstanding, are muted incentives to produce.

[Peter1469]

Another thought- the cheap money (low inflation) creates malinvestment in some sectors. Especially undisciplined sectors.

[Newpublius]

Another thought- the cheap money (low inflation) creates malinvestment in some sectors. Especially undisciplined sectors.

Cheap money is actually an inflationary policy notwithstanding the fact that inflation is currently low. Asset prices and interest are inversely related. When inflation fears its ugly head, the central bank will typically raise rates to dampen inflation. And yes, cheap money skews price signals.