Characteristics of Monetarism free essay sample

Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions. Monetarism is based on the belief that the economy is inherently stable and that markets work well when left to itself. Therefore Government intervention can often destabilize the economy. Therefore one of the main characteristics of monetarists is having a Laissez faire economy. Laissez faire is a doctrine opposing governmental interference in economic affairs beyond the minimum necessary i.e. maintenance of peace and property rights. This means that monetarist economists believe in the working of the private sector and market forces to stabilize the economy and are thus not a source of instability in the economy. They argue that the private sector is self-adjusting and tends to stabilize the economy by absorbing shocks. Instead they contend that it is the government sector that is the source of instability through instabilities in the money supply. They believe that money supply has a dominant effect on real output and price level in the short run, and on price level in the long run, fluctuations in the money supply lead to fluctuations in these macroeconomic variables. Moreover, the government, by changing the money supply, interferes with the normal workings of the self-adjusting mechanism of the private sector. In effect, the absence of money supply fluctuations would make it easier for the private sector mechanism to work properly. The rise of the popularity of monetarism picked up in politics when the Keynesian school of thought was unable to explain or fix the problems of rising unemployment and inflation, which should contradict each other if the Phillips curve which was largely followed at the time was to believed, this issues occurred in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. Friedman was an open critic of the Keynesian theories that had been the â€Å"Guiding light of US and British economic policy in the postwar period. His ideas provided an alternative option for economic critics, after the breakdown of the Keynesian international monetary system based on fixed exchange rates in 1971. [Jones, 2012] On one side of the curve higher unemployment seemed to call for higher government public spending, but on the other axis of the curve rising inflation seemed to call for an increase in taxes/cut in government public expenditure. Across the Atlantic President Jimmy Carter appointed a Federal Reserve chief Paul Volcker who made inflation fighting his primary objective, and restricted the money supply to tame inflation in the economy. The result was the creation of the desired price stability. Stagflation first became a major problem for the UK economy in the 1970s. Growth rates fell to 1. 4% between 1973 and 1978, with the rate of inflation rising to over 9% in the early 70s peaking at 26%, compared to a rate of around 3% in the 50s and 60s. Unemployment was also rising; it quadrupled between the 50’s and the 70’s to 1. 25 million. The labour government had to adopt monetarism to stop this crisis. In the 1975 budget, Healey planned to move away from the objective of full employment to tackle the government deficit despite rising unemployment. He shifted his view to dealing with high inflation which forced him to set limits for money supply, which indicated a major shift away from fiscal policy to monetary policy, hence monetarism. The UK also had an excessive welfare system and over bearing trade unions that suffocated the UK labour market. Therefore it would only be a small time until the UK would have a pro monetarist government thus putting monetarist. theories into practice. This happened in 1979 with the election of conservative leader Margaret Thatcher. She privatized many public industries with public sector output starting at 12% and being 2% by the end of 1997. She increased incentives to work also by reducing unemployment benefits and reducing marginal tax rates and implemented a MTFS (Medium Term Financial Policy) with minimum fiscal policy and increased monetary policy but both aligned to maintaining the natural rate of unemployment rather than full employment, and controlling inflation. The UK saw immediate improvement with Thatcher in charge of the country. When Margaret Thatcher and the conservative party gained control of the country, Britain had encountered many years of high inflation which rarely dropped below 10% and by the time of the election in May 1979 stood at 10. 3%. Thatcher implemented monetarism as the weapon in her battle against inflation, and succeeded at reducing it to 4. 6% by 1983. Between 1979 and 1991 UK growth was high by international standards but also more volatile, but since 1992 the UK has achieved both a higher and a smoother growth rate trajectory than other advance economies. Because of such success, monetarism still remained an important part of economic policy for the New Labour party when they gained control of the UK, and is now the main policy aimed at dealing with levels of inflation. Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions. Monetarism is based on the belief that the economy is inherently stable and that markets work well when left to itself. Therefore Government intervention can often destabilize the economy. Therefore one of the main characteristics of monetarists is having a Laissez faire economy. Laissez faire is a doctrine opposing governmental interference in economic affairs beyond the minimum necessary i. e. maintenance of peace and property rights. This means that monetarist economists believe in the working of the private sector and market forces to stabilize the economy and are thus not a source of instability in the economy. They argue that the private sector is self-adjusting and tends to stabilize the economy by absorbing shocks. Instead they contend that it is the government sector that is the source of instability through instabilities in the money supply. They believe that money supply has a dominant effect on real output and price level in the short run, and on price level in the long run, fluctuations in the money supply lead to fluctuations in these macroeconomic variables. Moreover, the government, by changing the money supply, interferes with the normal workings of the self-adjusting mechanism of the private sector. In effect, the absence of money supply fluctuations would make it easier for the private sector mechanism to work properly. The rise of the popularity of monetarism picked up in politics when the Keynesian school of thought was unable to explain or fix the problems of rising unemployment and inflation, which should contradict each other if the Phillips curve which was largely followed at the time was to believed, this issues occurred in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. Friedman was an open critic of the Keynesian theories that had been the â€Å"Guiding light of US and British economic policy in the postwar period. His ideas provided an alternative option for economic critics, after the breakdown of the Keynesian international monetary system based on fixed exchange rates in 1971. [Jones, 2012] On one side of the curve higher unemployment seemed to call for higher government public spending, but on the other axis of the curve rising inflation seemed to call for an increase in taxes/cut in government public expenditure. Across the Atlantic President Jimmy Carter appointed a Federal Reserve chief Paul Volcker who made inflation fighting his primary objective, and restricted the money supply to tame inflation in the economy. The result was the creation of the desired price stability. Stagflation first became a major problem for the UK economy in the 1970s. Growth rates fell to 1. 4% between 1973 and 1978, with the rate of inflation rising to over 9% in the early 70s peaking at 26%, compared to a rate of around 3% in the 50s and 60s. Unemployment was also rising; it quadrupled between the 50’s and the 70’s to 1. 25 million. The labour government had to adopt monetarism to stop this crisis. In the 1975 budget, Healey planned to move away from the objective of full employment to tackle the government deficit despite rising unemployment. He shifted his view to dealing with high inflation which forced him to set limits for money supply, which indicated a major shift away from fiscal policy to monetary policy, hence monetarism. The UK also had an excessive welfare system and over bearing trade unions that suffocated the UK labour market. Therefore it would only be a small time until the UK would have a pro monetarist government thus putting monetarist. theories into practice. This happened in 1979 with the election of conservative leader Margaret Thatcher. She privatized many public industries with public sector output starting at 12% and being 2% by the end of 1997. She increased incentives to work also by reducing unemployment benefits and reducing marginal tax rates and implemented a MTFS (Medium Term Financial Policy) with minimum fiscal policy and increased monetary policy but both aligned to maintaining the natural rate of unemployment rather than full employment, and controlling inflation. The UK saw immediate improvement with Thatcher in charge of the country. When Margaret Thatcher and the conservative party gained control of the country, Britain had encountered many years of high inflation which rarely dropped below 10% and by the time of the election in May 1979 stood at 10.3%. Thatcher implemented monetarism as the weapon in her battle against inflation, and succeeded at reducing it to 4. 6% by 1983. Between 1979 and 1991 UK growth was high by international standards but also more volatile, but since 1992 the UK has achieved both a higher and a smoother growth rate trajectory than other advance economies. Because of such success, monetarism still remained an important part of economic policy for the New Labour party when they gained control of the UK, and is now the main policy aimed at dealing with levels of inflation.