The Triumph of Monetarism?

This essay traces the 20th-century arc of “monetarism,” from Irving Fisher’s original turn-of-the-century quantity theory through the discipline’s late-1990s split between “New Classical” and “New Keynesian” research programs, asking why monetarism as a labeled school essentially disappeared even though De Long argues most of its substance did not. He distinguishes four successive subspecies. First Monetarism (Fisher’s own quantity-theoretic tradition) is judged to have failed chiefly because it lacked a sophisticated business-cycle theory, a gap that helped drive Keynes away from quantity theory altogether. Old Chicago Monetarism (the pre-war Viner-Simons-Knight “oral tradition”) stressed that velocity was unstable and that fractional-reserve banking made the money supply hard to control – though De Long treats the long-running dispute over whether this was ever a coherent “theory,” rather than retrospectively systematized policy views, as beside the point. Classic Monetarism – Friedman’s mature postwar synthesis – combined durable empirical and analytical contributions (stable money demand even under hyperinflation, the limits of stabilization policy given uncertain lags, the case for rule-based policy, the natural-rate-of-unemployment hypothesis, and the demonstrated potency of monetary policy) with an institutional-reform program (100 percent reserve banking plus constant money growth) that, De Long notes, never took hold as financial deregulation moved the other way. Political Monetarism, the simplified doctrine that briefly became official Federal Reserve and Bank of England policy in the late 1970s, went further than Classic Monetarism by treating velocity as simply stable and the money stock as a sufficient statistic for nominal demand – and it is this subspecies, De Long argues, that “crashed and burned” in the 1980s as Goodhart’s Law took hold and targeted aggregates lost their predictive power. De Long’s overall claim is that five analytical “planks” he associates with New Keynesian economics – nominal rigidities as the central business-cycle friction, the relative potency of monetary over fiscal policy, analyzing cycles around trend rather than below potential, evaluating policy through rules rather than case-by-case, and recognizing firm limits on what stabilization policy can achieve – all originate substantially in Friedman’s Classic Monetarism, so that the intellectual content of monetarism survives pervasively today even though the label itself, tainted by Political Monetarism’s empirical collapse, does not.

J. Bradford De Long | Macro Paper Warehouse

The Triumph of Monetarism?