They seek mass money creation at a time when production is low such that demand for money is low – meaning they explicitly call for devaluation – that creates the incentive among those with savings to spend it before it loses value. Expectations are the main source of business cycles. Keynesian economics stresses that the AS curve is relatively flat. A little about ourselves: This website observes the similarities and differences between Keynesian Economies and Monetarist Policies. Opinions expressed by Forbes Contributors are their own. In essence, monetarists say, “only money matters for aggregate demand”; Keynesians reply, “Money matters but so does fiscal policy”. They are very easily refuted, as they are based on simplified models of the world. Create your account. This is one of those economic precepts that so easily evoke the anguished cry of the economist: "It depends!" Similarities in “Savings” in Keynesian and Classical Economics Despite the classical theory, ignoring the fact that saving is a function of income by regarding it as a function of interests rate, the approach acknowledges that people do save for future consumption. Seeking the creation of money for the sake of it whereby economic growth can laughably be fostered in a laboratory of central planners in possession of a money printing press, their economic plan is one where money is devalued, and with the devaluation, consumption once again grows. Government spending once again pulls down wages, and similarly pulls down productivity enhancements that lead to the very production that drives up demand. To put it very plainly, there are no entrepreneurs without capital. Keynesians once again believe that growth is as simple as Washington taxing or borrowing away resources from the private sector so that it can be spent from the Commanding Heights. Try any of our Foolish newsletter services free for 30 days . The article Differences Between Monetarist Theory and Keynesian Theory of Money originally appeared on Fool.com. Pooping Less Frequently To Save The Planet? Readers are surely familiar with Paul Krugman’s frequent Keynesian droolings about how the U.S. economy suffers because the federal government hasn’t spent enough of our money. Could A ‘Morality Pill’ Help Stop The Covid-19 Pandemic? 14.2, which is self-explanatory. But, the process of reaching to the stability is difference as per Monetary and Keynesian approach. To paraphrase John Stuart Mill, we trade products for products, the surplus of our labor for the surplus of others. Citations I. About the U.S. not being an impregnable economic island, monetarists should take note as their theory similarly presumes Fortress U.S.A. Keynesian and monetarist theories offer different thoughts on what drives economic growth and how to fight recessions. Various macroeconomic theories were developed during these periods. Services, Working Scholars® Bringing Tuition-Free College to the Community. Only then, as in only when these adolescent twins cease poisoning the U.S. economy, will it resume the growth path that prevailed in the ‘80s and ‘90s. Monetarists agree with Austrians that inflation is always a monetary phenomenon, but believe in the Phillips curve, which predicts that inflation, up to a certain point, creates employment. Assuming shortages, American producers regularly access the world’s labor and the world’s factories such that growth could never impact the price level as is assumed. In other words, the impulse . Monetarist thinking in this regard is similarly obtuse. This conce… Back to reality, stable money in terms of value is credible, and because it's credible it's widely demanded and circulated. Considering lower income Americans, assuming they too could get a market return on monies saved, they, if they chose to save, would be made better off for consuming less and saving more. Monetary debasement sought by the Monetarist School achieves the same bad outcome for discouraging investors and businesses from committing capital to growth concepts that would increase production, and with it demand. Monetarism is a parallel version of Keynesian demand management. Monetarists desire unstable money that floats in value, meaning money that lacks credibility and that isn't highly demanded. Both sides desire capital consumption over the very saving that provides credit to the businesses that would otherwise move the economy forward. According to I.S. If 18-Year-Olds Can Fight For Their Country, They Should Be Able To Smoke A Cigarette. All other trademarks and copyrights are the property of their respective owners. Of course if we ignore that labor and capacity are dynamic as opposed to static, and similarly ignore technological enhancements that allow companies to produce increasing amounts with less labor and capacity, we can’t ignore that the U.S. is not an island. Really? The Demand-pull inflation of the Monetarist’s view can be expressed as the diagram below. Monetarists correctly argued that inflation is always a monetary phenomenon, but the newly revived theory that was long ago dismissed even by Friedman is merely a variation of the much discredited Phillips Curve. 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