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Sorry for the late reply. This has been a brutal couple of weeks. End of the year objectives mind you.
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Yep, that's fair enough. I'm certainly not dogmatically Keynesian either - nor am I averse to modern monetarist or neo-classical theory - I just find that my economic ideology, such that it is, is closer to that of the Keynesianism than anything else. This is not merely for ideological reasons, I might add: empirically, I find that economies with an active government presence (e.g. the Scandinavian countries) out-perform the economies without such governmental involvement, even in areas - such as economic efficiency and competitiveness - that neo-classicalism predicts them to fail in:
http://internationaltrade.suite101....itive_countries
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Ahh welcome to the "dismal" science. Yes those countries tend to outperform the US when it comes to economic growth, particularly GDP. So why is that? Can we neatly say it is because of the differences between Keynesian and Monetarist policies? I would find it extremely difficult to say so ... both Scandanavian countries and the US are heavy handed fiscal liberals. Could the difference lie in the fact that Scandanavian countries are socialist whilst the US is not? Well wait a minute, a lot of EU countries are socialist as well. And it's not like they're conservative when it comes to government spending either ... the US is -3.6% budget balance as a % of GDP and yet it appears to be doing quite well still, Germany is -3.1%, France is -2.9% yet they're stagnant. Compare this to Sweden at +1.7%, Switzerland at -.2% .... and you have to wonder what's going on ...
Are Keynesian economics driving the Scandanavian model for success and the lack thereof contributing to the failures of the US and the EU? I can see us getting into "right" keynesian policies vs. "wrong" Keynesian policies and then policies differ when you take into account varible x and y in country z, vs. whatever. If you can provide substantive correlation free from extraneous variable bias, you my friend would revolutionize economic policy among governments. Something I encourage you to do because it sucks not knowing what's right. 
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Sorry, I didn't phrase that very well.
The point I was trying to make is that any given economic policy should not be judged by its success in acheiving a single, specific economic target (in this case, low inflation) but rather by its effect on the economy as a whole. Afterall, we could get any of the major economic indicators (inflation, GDP growth, unemployment etc.) to virtually any level we wanted so long as we were willing to make large enough sacrifices in other areas. For instance, we could get GDP growth up to 20% if we were willing to cut taxes in half and cease our worrying about inflation. We could get unemployment to 0% if we were willing to nationalise industry and sacrifice productive efficiency. In each of these cases, though, the sacrifices - or oppurtunity costs - are too large to consider them as anything even approaching good economic policy.
So, with regards to the implementation of strict monetary controls in the late 70s, they certainly reduced inflation successfully - no question about that - but at what cost? GDP growth was in the negatives for the best part of 3 years. Unemployment ballooned. Interest rates increased far beyond expectations. In the UK - where expansionary fiscal policy was not employed - the problems persisted for much of the decade. As per my analogy with Marxism and the elimination of inequality, an economic target was certainly reached here, but it came with a great opportunity cost. I guess the question here is, if the consequences of the introduction of Friedman's monetary theory could have been seen before time, would they still have been implemented?
It's a fairly weak appeal, I know, but that's what it comes down to. If, with the glorious benefit of hindsight, we can look back on an action and suggest that it should not be repeated if we could have our time over again, can we really call it anything other than a "failure"?
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Well I don't think the primary goal of Volker was to reduce inflation at the expense of all other costs. The primary points from Friedman monetarism that Volker adopted was that Keynesian economics broke down at a certain point in the Phillips curve with respect to the inverse relationship between inflation and employment. What Friedman was arguing was that according to the expectations-augmented Phillips curve, pushing up prices and demand to push down unemployment by fooling workers into thinking that wages had risen relative to prices and thus making them more willing to offer their labour would naturally revert back to the "natural" rate after a period of time. This was advocated by Friedman before the 70's and confirmed by the stagflationary period to follow. What does 70's Keynesian economics argue in a period where rich nations suffer from increasing inflation and increasing unemployment? Friedman argued that at this point fiscal policy is futile ... the primary take away was that governments would always be better off adopting a stable monetary policy framework that adjusts according to inflation and growth levels. To sum things up, Volker's accomplishments were not simply to reduce inflation, Volker's principle achievement was the elimination of stagflation, a far more complex beast unexplained by Keynesian economics at the time, to which monetarism played a key roll imo.
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I agree that there can be no perfect solution to any problem (which goes for all pursuits, with the possible exception of mathematics: this isn't merely an issue confined to economics), but that doesn't mean that there aren't gradiations in the quality of imperfect solutions.
This isn't something I've studied in any great depth, but my understanding is that inflation in the 1970s can be traced back, primarily, to a sharp rise in oil prices (no surprise that the stagflationary pressures first appeared shortly after the advent of OPEC) and inflexible and inefficient supply-side conditions. With the benefit of hindsight yet again, labour-reform, supply-side liberalisation and perhaps modest contractionary policy (either fiscal or monetary) would have succeded in reducing inflation, may have helped unemployment (depending on the nature of the labour and supply-side reforms) and would certainly not have impacted on GDP growth any more severely than monetarist policies did.
I've got no way of proving that such policies would have been "successful", but my point here is that there were surely alternatives available to policy-makers at the time and that many of these would have been more successful than the ones that were eventually implemented. On these grounds, yet again, I can't help but see the monetarist policies that were implemented as - in some sense, at least - failures.
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I know of US staglation in the 70's (prior to supply-side economic policies), and I know that staglation occurred in Britain in the 60's but as I said I know nothing of British economic policies in the 60's much less the 70's or 80's to address any of those issues. So while I would be perfectly willing to dispute monetarist policies in the US as being "failures" to combat staglation I cannot speak so intelligently about Britain.
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I appreciate that fact, I really do. I don't want to come across as a dick by self-righteously sitting here, 30 years in the future, criticising people who made decisions that, at the time, must have made a lot of sense, but nevertheless I am a big supporter of the primacy of objective truth and empirical fact in economic (and virtually all other) matters and in this context it's hard to say that the decisions made at the time were - objectively or empirically - the "right" ones. This isn't a personal judgement on Friedman or the other early monetarists, it's merely what I consider to be a sterile matter of fact.
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You're completly right, however, we're all struggling for the "right" answer. What frustrates me about economics is that if we follow the example laid out by arbitrage, we all end up being wrong to a certain degree in the long run.
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Haha well I doubt it, but thanks anyway.
I want to point out that my argument here isn't against monetary theory - which I am nowhere near equipped to argue against - but rather its outcomes. Early-monetarism may well have been the greatest economic theory ever advocated, but - in my eyes at least - it failed the empirical test which immediately erodes its legitimacy.
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Bear in mind I've been out of school for several years and I work in Finance not economics. I have no doubts in my mind that many recent economics graduates can sufficeintly out-argue me. So how did you get involved in this "science"?
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Monetarism in general, or the specific monetary policies that were implemented in the 70s and 80s? I don't necessarily disagree with the former, but would certainly take issue with the latter.
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I was speaking with respect to the 70's, but I would enjoy to hear what you have to say about the 80's.
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To be honest, I would argue that it was necessary.
The US and the UK employed nearly employed nearly identical monetary policies. The US employed massive fiscal expansionary measures shortly after, the UK didn't. The US economy recovered, the UK economy didn't for the best part of a decade. Granted we're comparing two different economies here, but the question still has to be asked: aside from fiscal policy, what else could explain the differences in fortune?
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So perhaps here is one of those issues whereby I did not want to engage in a classical monetarist debate vs. everything else. Clearly classical monetarism failed in this regard (hence the reason why I'm not a classical monetarist). I think disinflation policies "work" , as evidenced by Volker, up until a certain point and beyond that, staglation needs a combined Friedman/Keynesian approach according to what limited empirical evidence we have. However, I would still contend that in times of relative normality, pegging monetary policy to the growth of the money supply is still the ideal policy.
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But I don't think it did "fail when originally implemented": in fact, I would argue that the rapid growth experienced in the world economy between 1945 and the mid 1970s can be directly attributed to Keynesian policy. The failures that the world economy experienced in the mid 1970s - due to oil prices and supply-side rigidity - could have been solved (at least theoretically, perhaps through the measures I mentioned earlier) through Keynesian policy as well.
On the other hand, I don't want to give the impression that the inability to address stagflation during that time was not a severe failure on behalf of the Keynesian economic orthodoxy of the time. I think they saw inflation and unemployment as enjoying a naturally inverse relationship and froze when that turned out not to be the case. There was a need to re-adjust economic thinking during that period and the advent of monetarism certainly succeded in that regard. Whether we can therefore say that the monetarist policies of the time were "successful" though is quite another matter. |
Well classical Keynesian economic theory was the dominant policy at the time ... the relationship between inflation and unemployment was a key concept as well. So if they were wrong didn't it "fail"? if you want to pin classical monetarism on me using the example of Britain, I can accept that. However, I'm going to have to hold you to the same standard. In other words classical Keynesianism failed much like classical monetarism failed. Classical Keynesian economics failed to predict staglation.
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Does it though? Was the US rescued from recession earlier this decade through fastidious controls on the supply of money or through tax-cuts and corresponding budget-deficits of unparalleled magnitude? How frequently are economic issues solved through governmental intervention?
Keynesianism may not be explicitly endorsed by the powers that be all that often any more, but the principles remain in practice. The government is still an undeniably important variable in the overall economic equation.
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Maybe? I've always contended that monetarism has always been a far more effective tool. The US has been in recession for 2 quarters in the past 6 years. I don't know how much of an effect can be attributed to fiscal or monetary policy. Not that I disagree with fiscal policy in the slightest ... I simply don't know how much of an impact it has. During times of depression the keynesian in me argues for it ... during times of normality I'm a strict monetarist due to all the lags. Take into account France and Germany have large account deficiets and yet their economies are renowned for being relatively stagnant. Yes many would argue this is due to systemic issues rather than economic policies but it says something about the variability of the issue.
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I'm not denying that Keynesianism, in general, has not had failures, but I would still argue that its success to failure ratio over the past century surpasses that of any of its rivals. The best performing economies have, historically, required large-scale government involvement: I believe that the current success of China and India, for instance, can be attributed to well-placed governmental involvement.
Now, admittedly, in the long-run, capitalistic economies need to tend towards market liberalism to sustain growth and that is certainly not something I would argue against as a nominal Keynesian. I believe in no more governmental involvement than is necessary to achieve a stable, growing economy. I do not, however, believe that an economy can acheive stable growth over a sustained period of time without principled and well-judged governmental intervention. Yet again, I believe that the historical facts will vindicate me on this point.
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And monetarism does not dispute any of that since it is a measure of government involvement. Monetarism simply sets forth policies that are somewhat contrary and competitive to Keynesian policies as the most efficient and/or effective tools to acheive economic stability. Something that I think that historical facts are still in no position to make a substantive judgement.
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Haha, well it was never my intention to begin a debate about the merits of Keynesianism when I first posted in this thread, believe me. My point there wasn't that the theory of monetarism is essentially flawed (as a second year student, I still lack the theoretical grounding necessary to argue that point) but rather that monetarism - through the policies implemented in the 1970s and 1980s - was a largely unsuccessful enterprise. I don't think we need to introduce meta-debates about the viability of Keynesianism or neo-classicalism to reach a consensus about that.
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Eh ... you'll adopt a school eventually . It's funny, I don't meet many economists who completely sit on the fence. For now I'm a (neo) monetarist. I'm sure you'll eventually come to a conclusion as to what you are as you study the evolution of economics. I've found that certain theories simply appeal to you. So you're a second year what? Are you aspriing to become an economist?
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Retro ...
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