Monetarist Counter-revolution Research Articles

Great Recession and Macroeconomic Theory: A Useless Crisis?

ABSTRACTThe global financial crisis of 2007–08 and the subsequent Great Recession have pushed many economists to acknowledge a fundamental limit in the theoretical models elaborated after the monetarist counter-revolution: these models disregard the financial system. The years following the Great Recession have thus been marked by the development of what can be called the ‘Financial Frictions Approach’, a theoretical approach based on the addition of the financial system to the New Keynesian DSGE model. The results of this line of research are beginning to appear also in macroeconomics textbooks. Significant examples are the publication of the seventh edition of Blanchard’s textbook, and the publication of the third edition of the textbook co-authored by Blanchard, Amighini and Giavazzi. The objective of this work is twofold: (i) to show that the new model presented by Blanchard, Amighini and Giavazzi, which reflects the results of the ‘Financial Frictions Approach’, does not allow to elaborate a coherent explanation of the Great Recession and (ii) to present the pillars of an alternative theoretical model based on the lessons of Keynes, Schumpeter and Minsky.

The intellectual origins of the monetarist counter-revolution reconsidered: how Clark Warburton influenced Milton Friedman’s monetary thinking

Clark Warburton’s contributions during the 1940s and early 1950s are widely considered to have anticipated the key tenets of the monetarist counterrevolution of the 1960s and the 1970s. Hitherto, however, Warburton has not been considered as someone whose views may have directly shaped the development of Milton Friedman’s monetarist views. While it is not possible to establish a direct causal line between Warburton’s views and Friedman’s monetarism, including its emphasis on the efficacy and primacy of open-market operations, the preferability of a monetary-growth rule to attain price-level stability, the need of a clear separation of a government’s fiscal operations from the monetary-policy operations of the central bank, and the destructive role played by the Fed in the Great Depression, this paper shows that the connection between Warburton’s contributions and Friedman’s monetarism is considerably tighter than previously thought.

Three revolutions in macroeconomics: their nature and influence

Harry Johnson's 1971 ideas about the factors affecting the success of the Keynesian Revolution and the Monetarist Counter-revolution are summarised and extended to the analysis of the Rational Expectations-New Classical (RE-NC) Revolution. It is then argued that whereas Monetarism brought about a revival of the quantity theory of money from the limbo into which Keynesianism had pushed it, RE-NC modelling was responsible for that theory's most recent disappearance. This happened despite the fact that, initially, RE-NC economics appeared to be a mainly technical extension and refinement of Monetarism, rather than a radically new economic doctrine. Some implications of this story for todays’ macroeconomics are briefly discussed.

The Interaction between Economic Theories and Policies in Belgium, 1944-2000

We analyse the impact of economists on post-war economic policy in Belgium. The severe budgetary and monetary crisis of the mid-1920s which brought the country on the brink of hyperinflation and a state moratorium, framed economic policy for several decades to come. Until the mid-1950s inflation fighting and a stable currency became an obsession in both economic thought and policy. In this climate the penetration of Keynesianism and of regional development policies was seriously delayed. Therefore the period between the mid-1950s and early 1960s was an important watershed. From then Keynesianism in its various forms blossomed. New paradigms, such as the monetarist counter-revolution and supply-side economics, failed to make a breakthrough in academia and had little or no impact on economic policy. Reckless economic policies in the aftermath of the two oil crises temporarily broke down the long run consensus concerning a stable currency.

Professor Fisher and the quantity theory – a significant encounter

Irving Fisher's encounter with the Quantity Theory of Money began in the 1890s, during the debate about bimetallism, and reached its high point in 1911 with the publication of The Purchasing Power of Money. His most important refinement of the theory, derived from his recognition of bank deposits as means of exchange, was to treat their out of equilibrium recursive interaction with inflation as integral to it. This treatment underlay both his 1920s work on the business cycle as a “dance of the dollar” and his advocacy of subjecting monetary policy to a legislated price stability rule, initially to be based on his “compensated dollar” scheme. Fisher's failure to recognise the onset of the Great Depression even as it was happening was directly related to his faith in the quantity theory's seeming implication that price level stability in and of itself guaranteed the continuation of prosperity, while his subsequent work on the debt deflation theory of great depressions initially failed to repair the damage that this failure did to his reputation, and to that of the quantity theory. In the 1930s Fisher nevertheless remained an active supporter of various schemes to reflate and then stabilise the price level. His subsequent influence on the quantity theory based Monetarist counter-revolution that began in the 1950s lay, directly, in its deployment of his analysis of expected inflation on nominal interest rates, and, indirectly, in its espousal of the case for subjecting monetary policy to a legislated rule.

The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View?

The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination. Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. The goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message. The paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them. The designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner's functional finance approach. The paper distinguishes between two approaches to functional finance - one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation. It is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment - a link that the Post-Keynesian approach promises to restore.

Whatever Became of the Monetary Aggregates?

My title intentionally harks back to Maurice Peston's slim, but excellent, 1980 book, entitled Whatever Happened to Macro-economics. In this book, a compilation of three lectures, Maurice asks how much then remained of traditional Keynesian macroeconomics in the aftermath of the monetarist counter-revolution, and of the development of Lucasian rational expectations. Maurice was much more impressed by the new contributions of the rational expectations school than he was of those by the more traditional monetarists.

Retrospectives: Was the Monetarist Tradition Invented?

In 1969, Harry Johnson charged that Milton Friedman 'invented' a Chicago oral quantity theory tradition, the idea being that in order to launch a monetarist counter-revolution, Friedman needed to establish a linkage with pre-Keynesian orthodoxy. This paper shows that there was a distinct pre-Keynesian Chicago quantity-theory tradition that advocated increased government expenditure during the Great Depression in order to put money directly into circulation. This policy stance distinguished the Chicago economists from other quantity theorists, leaving them less susceptible to the Keynesian revolution. Those who have been critical of Friedman's claim that his work derives from the earlier Chicago tradition have focused exclusively on Friedman's long-run empirical specification of money demand. Friedman's cyclical analysis is shown to be very much in the Chicago tradition. Other connections between Friedman's views and the Chicago tradition are also discussed.

The development of modern macroeconomics: Reflections in the light of Johnson's analysis after twenty-five years

This paper considers how far factors advanced by Harry Johnson some twenty-five years ago to explain the success of the Keynesian revolution and subsequent monetarist counter-revolution, can help in understanding why new classical macroeconomics has had such an impact on the more recent development of macroeconomics. At least three of Johnson's five “internal scientific characteristics” are seen to have played an important role in the development of both versions of new classical macroeconomics.

Capitalism with a Human Face

Introduction - footfalls in the memory. Part 1 Political economy: economics and ethics two cheers for self-interest choice and utility "there is no such thing as society". Part 2 Keynes and Hayek: can democracy manage an economy? Hayek's "spontaneous social order". Part 3 Jobs, inflation and economic management: what remains of the monetarist counter-revolution? countries do not have deficits the role of the exchange rate. Part 4 Problems and policies: the Thatcher government's economic legacy a perspective on unemployment. Part 5 Capitalism with a human face: redistribution - yes, equality - no basic income and the Welfare State finale.

L. Albert Hahn: A Precursor of Keynesianism and the Monetarist Counterrevolution

Research Article| June 01 1990 L. Albert Hahn: A Precursor of Keynesianism and the Monetarist Counterrevolution Donald J. Boudreaux; Donald J. Boudreaux Search for other works by this author on: This Site Google George A. Selgin George A. Selgin 1 Search for other works by this author on: This Site Google History of Political Economy (1990) 22 (2): 261–279. https://doi.org/10.1215/00182702-22-2-261 Cite Icon Cite Share Icon Share Facebook Twitter LinkedIn MailTo Permissions Search Site Citation Donald J. Boudreaux, George A. Selgin; L. Albert Hahn: A Precursor of Keynesianism and the Monetarist Counterrevolution. History of Political Economy 1 June 1990; 22 (2): 261–279. doi: https://doi.org/10.1215/00182702-22-2-261 Download citation file: Zotero Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search Books & JournalsAll JournalsHistory of Political Economy Search Advanced Search The text of this article is only available as a PDF. Copyright © 1990 by Duke University Press1990 Article PDF first page preview Close Modal You do not currently have access to this content.

MAJOR ISSUES IN MONETARY ECONOMICS

THE purpose of this paper is to survey the major issues in monetary economics, with a view to discerning the most fruitful lines of future theoretical and empirical research. This is a useful point in time at which to undertake such a survey, for both a negative and a positive reason. The negative reason is that the upsurge of the monetarist counter-revolution, which began some years ago in the United States on the basis of the proven failure of Keynesian fiscal policy to control inflation, and which promised to revitalize the whole field of monetary economics in this and other countries previously dominated by Keynesianism, has subsided into disarray due to the failure of monetarism, as understood by the public, to deliver policies effective in controlling inflation effectively and without prolonged and relatively large-scale unemployment. (It should be noted that the leading monetarists never promised such easy success, but the public nevertheless was led to expect it; meanwhile, 'monetarism' has learned from the experience a great deal about the importance of priceexpectations, lags, and micro-economic market functioning, while 'Keynesianism' has largely retreated into a desperate appeal for rescue to the sociologists and a reiteration of the need for an incomes policy-despite its historically amply proven futility-to control the key monetary variable that is left undetermined in the Keynesian model.) The positive reason is the arrival of a new generation of monetary economists, come too lately and from too diverse origins to be partisans of rather than learners from the Keynesian revolution and the monetarist counter-revolution, and equipped with requisite mathematical and statistical tools to forward the scientific evolution of monetary economics. There is therefore a challenge to be met, and a scientifically useful response possible. But there are dangers that the opportunity will be wasted by distraction of effort to activities of peripheral scientific value. Apart from the fact that the collapse of the established international monetary system over the past two years has tended to concentrate attention on the short-run policy problems of international crisis, there are three major reasons for concern about the present state of monetary economics. First, there is a noticeable tendency for the relics of the Keynesian revolution and their contemporary disciples to attempt to force anyone seriously interested in the influence of money and of monetary policy into the mould of the largely fictitious 'classical orthodoxy' against which the Keynesian