Socialist Approach Research Articles

LEADING ECONOMISTS at opposite ends of the American political spectrum have been sharply critical of monetary policy as a tool for controlling business fluctuations. Milton Friedman' argues that, since shortterm fluctuations are so difficult to forecast, attempts to use monetary policy as a tool for offsetting them will usually add to instability rather than reducing it. He proposes a steady annual growth in the money supply to provide a stable monetary background for shortrun economic adjustments and assure long-run price stability. John Galbraith2 maintains that the use of monetary policy to control price inflation involves a basic inconsistency, since it cannot attack the wage-price spiral directly and can operate only by reducing total demand. This leads to unemployment and idle capacity, a result in conflict with the full employment goals of our society. Ultimately, Galbraith seeks a reappraisal of the nation's social objectives and a more managed economy. In the more limited context of controlling price inflation, he states that selective direct controls would prevent wages and prices from interacting on each other, and suggests that the opposition to such controls is unjustified. Criticism by such different people for such different reasons points up the compromises implicit in money policy as it is practiced in the United States today. From an economic standpoint, its objective is to steer a middle course between the extremes of unemployment and destabilizing price inflation. Politically, it represents a compromise between 19th century laissez faire on the one hand and the more socialist approach of direct controls on the other. Many of the critics of monetary policy are professors, with the academic penchant for assuming away the real world problems that can bedevil the tidy conclusions possible in the ivory tower. Even these people agree that monetary tools have been, or can be, effective. Most economists of more moderate political persuasion, measuring the performance of monetary policy in terms of what is possible in the real world rather than against an abstract ideal, accept its usefulness in the control of business fluctuations. They will differ over what specific course is appropriate in a particular situation, which is a more limited and concrete issue.

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