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Old 23-03-2009, 02:45 PM   #1 (permalink)
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Neo-Keynesian vs. Monetary Policy

I'm a layman on economics. I recall that Keynes believed in government action during booms and busts. Monetary policy (Milton Friedman) proposed less/no government internvention, and also advocated altering the money supply in regard to inflation.

What is Neo-Keynesian thinking. And one serious question: Is Obama and his administration a mixture of:

Keynesian and Monetarist policy? It's this administration is doing aspects of both.

Are the two mutually exclusive?

Quote:
It's Best Keynes Remain Forgotten

By J.T. Young on 10.29.08


Out of crisis comes opportunity. Unfortunately, neo-Keynesians are trying to seize this chance to rewrite both economic history and theory. As case in point is the Washington Post's October 19 piece by Robert Skidelsky entitled "We Forgot Everything Keynes Taught Us." Attempting to rehabilitate Keynesian economics and denigrate the more successful monetarist approach, the neo-Keynesians achieve neither. However allowing the attempt to go unchallenged would, in Skidelsky's own words, risk basing "economics on assumptions that [have been] so often discredited by events."



Skidelsky's neo-Keynesian thesis is "the New Economics, as Keynesian economics was known in the United States….[It] held that governments should vary taxes and spending to offset any tendency for inflation to rise or output to fall." He states such manipulation was beneficial, effective, and would have prevented the current financial crisis. That it did not is because of the ascendancy of the monetarist school's counter-argument that "inflation was due to governments' printing too much money" and that "asset bubbles can [not] coexist with a stable price level."


The fatal flaw in this simplistic explanation, that economic downturns could be governmentally fine-tuned away, are its empirical and theoretical inaccuracies. First, Keynesian economics was neither beneficial nor effective and has been rightfully superseded as a result. Second, nowhere in the monetarist approach exists the "theory" that stable prices equal stable markets; nor are there grounds for assuming a Keynesian-regulated economy equates to regulated markets.



Despite conceding the Keynesian failure -- it "generated its own problems, causing it to collapse into stagflation in the 1970s" -- Skidelsky states that "the years from 1950 to 1975 were a golden age." Ignoring the author's arbitrary date selection, an examination of post-WWII until monetarism's successful implementation by Federal Reserve chairman Paul Volcker in the 1980s shows the U.S. experienced eight recessions during 1947-1982. During this 36-year period, CPI-U inflation (year-over-year) was above four percent in 19 years. Hardly "golden" results.

Link & Entire: The American Spectator : It's Best Keynes Remain Forgotten
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Old 23-03-2009, 02:48 PM   #2 (permalink)
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Friedman advocated keeping money supply growth constant as the private sector will self adjust.
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Old 23-03-2009, 02:57 PM   #3 (permalink)
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Originally Posted by madjbs View Post
Friedman advocated keeping money supply growth constant as the private sector will self adjust.
Thanks, madjibs. I want to learn more. I was totally wrong. I better brush up.

Friedman advocating keeping the money supply constant is opposed to Keynes correct?
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Old 24-03-2009, 05:50 PM   #4 (permalink)
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Keynes advocated both monetary policy and fiscal policy, depending on the nature of the interest elasticity of investment and money demand. Inelastic investment and elastic money demand are the conditions for effective fiscal policy and the opposite is true monetary policy.

Both Monetarism and Keynesian theories are out of date though, since that period other models such as New Classics, Real Business Cycle and New Keynesian have been introduced.

Basically Only Keynes advocated any government intervention, others stated it was useless in adjusting output and labour and it only effected price level. Apart from the case of Income tax which is recognized in both Classical and Keynesian theories.

Monetarism is a blend of Keynesian and Classical Theory, in that both AD and AS can increase output. In Classical theories only AS can determine output and in Keynesian theory, manipulation of AD effects output through government policy.
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