Monetary history. Modern monetarism

Predecessors of monetarism

Main article: Quantity theory of money

J. Mill

The understanding that price changes depend on the volume of money supply has come to economic theory since ancient times. So, back in the 3rd century BC. e. This was stated by the famous ancient Roman lawyer Julius Paulus. Later in 1752, the English philosopher D. Hume, in his “Essay on Money,” studied the relationship between the volume of money and inflation. Hume argued that an increase in the money supply leads to a gradual increase in prices until they reach their original proportion with the amount of money in the market. These views were shared by the majority of representatives of the classical school of political economy. By the time Mill wrote his “Principles of Political Economy,” a quantitative theory of money had already been developed in general form. To Hume's definition, Mill added a clarification about the need for constancy in the structure of demand, since he understood that the supply of money can change relative prices. At the same time, he argued that an increase in the money supply does not automatically lead to an increase in prices, because monetary reserves or product supply can also increase in comparable volumes.

Within the framework of the neoclassical school, I. Fisher in 1911 gave the quantity theory of money a formal form in his famous equation of exchange:

,

The modification of this theory by the Cambridge school (A. Marshall, A. Pigou) formally looks like this:

,

Fundamentally, these approaches differ in that Fisher attaches great importance to technological factors, and representatives of the Cambridge school - to consumer choice. At the same time, Fisher, unlike Marshall and Pigou, excludes the possibility of the interest rate influencing the demand for money.

Despite scientific recognition, the quantity theory of money did not go beyond academic circles. This was due to the fact that before Keynes, a full-fledged macroeconomic theory did not yet exist, and the theory of money could not be applied in practice. And after its appearance, Keynesianism immediately took a dominant position in the macroeconomics of that time. During these years, only a small number of economists developed the quantity theory of money, but despite this, interesting results were obtained. So, K. Warburton in 1945-53. found that an increase in the money supply leads to higher prices, and short-term fluctuations in GDP are related to the money supply. His works anticipated the advent of monetarism, however, the scientific community did not pay much attention to them.

The formation of monetarism

In 1963, Friedman’s famous work, co-authored with D. Meiselman, “The Relative Stability of the Velocity of Money Circulation and the Investment Multiplier in the United States for 1897-1958,” was published, which caused heated debate between monetarists and Keynesians. The authors of the article criticized the stability of the spending multiplier in Keynesian models. In their opinion, nominal money income depended solely on fluctuations in the supply of money. Immediately after the publication of the article, their point of view was severely criticized by many economists. At the same time, the main complaint was the weakness of the mathematical apparatus used in this work. Thus, A. Blinder and R. Solow later admitted that such an approach is “too primitive for representing any economic theory.”

In 1968, Friedman’s article “The Role of Monetary Policy” was published, which had a significant impact on the subsequent development of economic science. In 1995, J. Tobin called this work "the most significant ever published in an economics journal." This article marked the beginning of a new branch of economic research, the theory of rational expectations. Under its influence, Keynesians had to reconsider their views on the justification of active policy.

Key Points

Demand for money and supply of money

By suggesting that the demand for money is similar to the demand for other assets, Friedman was the first to apply the theory of demand for financial assets to money. Thus, he obtained the money demand function:

,

According to monetarism, the demand for money depends on the dynamics of GDP, and the demand function for money is stable. At the same time, the money supply is unstable, as it depends on unpredictable government actions. Monetarists argue that in the long run real GDP will stop growing, so changes in the money supply will have no effect on it, affecting only the inflation rate. This principle became the basis for monetarist economic policy and was called neutrality of money .

Monetary rule

In connection with the principle of neutrality of money, monetarists advocated legislative enshrinement monetarist rule, which is that the money supply should expand at the same rate as the growth rate of real GDP. Compliance with this rule will eliminate the unpredictable impact of countercyclical monetary policy. According to monetarists, a constantly increasing money supply will support expanding demand without causing increased inflation.

Despite the logic of this statement, it immediately became the object of sharp criticism from Keynesians. They argued that it would be foolish to abandon an active monetary policy, since the velocity of money is not stable, and a constant increase in the money supply can cause serious fluctuations in aggregate spending, destabilizing the entire economy.

Monetarist concept of inflation

Natural rate of unemployment

See also article: Natural rate of unemployment (monetarism)

An important place in the monetarists’ argumentation is occupied by the concept of “ natural rate of unemployment" Natural unemployment refers to voluntary unemployment, in which the labor market is in an equilibrium state. The level of natural unemployment depends both on institutional factors (for example, on the activity of trade unions) and on legislative ones (for example, on the minimum wage). The natural rate of unemployment is the level of unemployment that keeps the real wage and price level stable (in the absence of growth in labor productivity).

According to monetarists, deviations of unemployment from its equilibrium level can only occur in the short term. If the employment level is above the natural level, then inflation rises; if it is lower, then inflation decreases. Thus, in the medium term, the market comes to an equilibrium state. Based on these premises, it is concluded that employment policy should be aimed at smoothing fluctuations in the unemployment rate from its natural norm. At the same time, it is proposed to use monetary policy instruments to balance the labor market.

Permanent Income Hypothesis

In his 1957 paper, The Theory of the Consumption Function, Friedman explained consumer behavior in permanent income hypothesis. In this hypothesis, Friedman states that people experience random changes in their income. He considered current income as the sum of permanent and temporary income:

Permanent income in this case is similar to average income, and temporary income is equivalent to a random deviation from average income. According to Friedman, consumption depends on permanent income, as consumers smooth out fluctuations in temporary income with savings and borrowed funds. The permanent income hypothesis states that consumption is proportional to permanent income and mathematically looks like this:

where is a constant.

Monetary theory of the business cycle

The main provisions of Friedman's concept

1. The regulatory role of the state in the economy should be limited to control over money circulation;
2. A market economy is a self-regulating system. Disproportions and other negative manifestations are associated with the excessive presence of the state in the economy;
3. The money supply affects the amount of spending by consumers and firms. An increase in the supply of money leads to an increase in production, and after full capacity utilization - to an increase in prices and inflation;
4. Inflation must be suppressed by any means, including by cutting social programs;
5. When choosing the growth rate of money, it is necessary to be guided by the rules of “mechanical” growth of the money supply, which would reflect two factors: the level of expected inflation; rate of growth of the social product.
6. Self-regulation of the market economy. Monetarists believe that a market economy, due to internal tendencies, strives for stability and self-adjustment. If disproportions and violations occur, this occurs primarily as a result of external interference. This provision is directed against the ideas of Keynes, whose call for government intervention leads, according to monetarists, to a disruption of the normal course of economic development.
7. The number of government regulators is reduced to a minimum. The role of tax and budget regulation is excluded or reduced.
8. The main regulator influencing economic life is “money impulses” - regular money emission. Monetarists point to the relationship between changes in the quantity of money and the cyclical development of the economy. This idea was substantiated in the book “Monetary History of the United States, 1867-1960” by American economists Milton Friedman and Anna Schwartz, published in 1963. Based on the analysis of actual data, it was concluded that the subsequent onset of one or another phase of the business cycle depends on the growth rate of the money supply. In particular, lack of money is the main cause of depression. Based on this, monetarists believe that the state must ensure constant money emission, the value of which will correspond to the rate of growth of the social product.
9. Refusal of short-term monetary policy. Since changes in the money supply do not immediately affect the economy, but with some delay (lag), the short-term methods of economic regulation proposed by Keynes should be replaced with long-term policies designed for a long-term, permanent impact on the economy.

So, according to the views of monetarists, money is the main sphere that determines the movement and development of production. The demand for money has a constant upward trend (which is determined, in particular, by the propensity to save), and in order to ensure correspondence between the demand for money and its supply, it is necessary to pursue a gradual increase (at a certain pace) of money in circulation. State regulation should be limited to control over monetary circulation.

Monetarism in practice

Monetary targeting

The first stage in the implementation of the monetarism policy by Central Banks was the inclusion of monetary aggregates in their econometric models. Already in 1966, the US Federal Reserve began studying the dynamics of monetary aggregates. The collapse of the Bretton Woods system contributed to the spread of the monetarist concept in the monetary sphere. The central banks of the largest countries have stopped targeting exchange rates in favor of monetary aggregates. In the 1970s, the US Federal Reserve chose the M1 aggregate as an intermediate target, and the federal funds rate as a tactical target. After the US, Germany, France, Italy, Spain and the UK announced targets for money supply growth. In 1979, European countries agreed to create the European Monetary System, under which they pledged to keep the exchange rates of their national currencies within certain limits. This led to the fact that the largest countries in Europe targeted both the exchange rate and money supply. Small countries with open economies such as Belgium, Luxembourg, Ireland and Denmark continued to target only the exchange rate. However, in 1975, most developing countries continued to maintain some kind of fixed exchange rate. However, starting from the late 1980s, monetary targeting began to give way to inflation targeting. And by the mid-2000s, most developed countries switched to a policy of defining an inflation target rather than monetary aggregates.

Notes

1. Moiseev S. R. The rise and fall of monetarism (Russian) // Economic issues. - 2002. - No. 9. - P. 92-104.
2. M. Blaug. Economic thought in retrospect. - M.: Delo, 1996. - P. 181. - 687 p. - ISBN 5-86461-151-4
3. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and expanded. - M.: Norma, 2007. - P. 516. - 672 p. - ISBN 978-5-468-00026-7
4. Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 548-549. - 820 s. - ISBN 5-7567-0235-0
5. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and expanded. - M.: Norma, 2007. - P. 517. - 672 p. - ISBN 978-5-468-00026-7
6. Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 551. - 820 p. - ISBN 5-7567-0235-0
7. B. Snowdon, H. Vane. Modern macroeconomics and its evolution from a monetarist point of view: an interview with Professor Milton Friedman. Translation from Journal of Economic Studies (Russian) // Ecowest. - 2002. - No. 4. - P. 520-557.
8. Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 563. - 820 p. - ISBN 5-7567-0235-0
9. S. N. Ivashkovsky. Macroeconomics: Textbook. - 2nd edition, corrected and expanded. - M.: Delo, 2002. - P. 158-159. - 472 s. - ISBN 5-7749-0178-5
10. K. R. McConnell, S. L. Brew. Economics: principles, problems and policies. - translation from the 13th English edition. - M.: INFRA-M, 1999. - P. 353. - 974 p. - ISBN 5-16-000001-1
11. Course in Economic Theory / Ed. Chepurina M. N., Kiseleva E. A. - Kirov: ASA, 1995. - P. 428-431. - 622 s.
12. M. Blaug. Economic thought in retrospect. - M.: Delo, 1996. - P. 631-634. - 687 p. - ISBN 5-86461-151-4
13. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and expanded. - M.: Norma, 2007. - P. 483. - 672 p. - ISBN 978-5-468-00026-7
14. N. G. Mankiw. Macroeconomics. - M.: MSU, 1994. - P. 602-604. - 736 p. - ISBN 5-211-03213-6

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topic: Theory and politics of monetarism

Introduction

Inflation is always and everywhere connected with money.

It manifests itself in

that the amount of money will increase

significantly faster than production volume.

Milton Friedman

Financial and monetary systems need management. Government agencies, including the Central Bank, have to make fundamental decisions regarding the formulation of the monetary standard, the determination of the amount of money in circulation, the establishment of exchange rate rules, the management of international financial flows, and the degree of tightness or laxity of their monetary policy. .

Today, there are different opinions about the preferability of one or another method of managing the monetary sphere. Some experts believe in an active policy, when when there is a threat of inflation, the growth rate of the money supply should be slowed down, and vice versa. Others are quite skeptical about the ability of government officials to use monetary policy to “fine-tune” the economy, inflation and unemployment. Finally, there are monetarists who believe that strong-willed monetary policy should give way to rules-based policies.

Over the past three decades, Keynesian theory has been challenged by alternative macroeconomic concepts, particularly monetarism and the theory of rational expectations (RET). The development of these theories was led by outstanding world-famous scientists. Thus, the Keynesian concept of employment without stabilization policies, which dominated after the Second World War in the macroeconomic views of most economists in all countries with market industrial economies, was developed by a group of five future Nobel laureates - Paul Samuelson, Franco Modigliani, Robert Solo, James Tobin and Lawrence Clive .

The 1976 Nobel Prize winner in economics, Milton Friedman, who became the intellectual leader of the monetarist school, held different views. He initiated empirical and theoretical research showing that money plays a much more important role in determining the level of economic activity and prices than Keynesian theory assumed.

But economic thought does not stand still; after some time, Robert Lukes, Thomas Sargent and Neil Wallace developed the theory of rational expectations (TRO), which is part of the so-called new classical economic theory.

The purpose of the course project is to become familiar with the theory of monetarism.

1. Origins of monetarism

Monetarism is an economic theory according to which the money supply in circulation plays a decisive role in the stabilization and development of a market economy. Monetarism arose in the 50s. The monetarist approach to economic management was widely used in the USA, Great Britain, Germany and other countries during the period of overcoming stagflation in the 70s and early 80s, as well as in the early 90s during the transition to a market economy in Russia.

The pinnacle of the theoretical developments of monetarism were the concepts of stabilizing the American economy and the well-known “reagonomics”, the implementation of which helped the United States to weaken inflation and strengthen the dollar. After Keynesianism, the concepts of the Chicago School became the second example of the effective use of economic theory in US economic practice.

The founder of monetarism is the creator of the Chicago school, Nobel Prize winner in 1976, M. Friedman.

According to the theory of monetarism, the supply of money is the main factor in short-term fluctuations in nominal GDP and long-term fluctuations in prices. Of course, Keynesians also recognize the key role of money in determining the magnitude of aggregate demand.

The main difference in the views of monetarists and Keynesians is that their approaches to determining aggregate demand are fundamentally different. Thus, representatives of the Keynesian school believe that changes in aggregate demand are influenced by many factors, while monetarists argue that the main factor influencing changes in production volume and prices is a change in the supply of money.

1.1 Milton Friedman

Milton Friedman (born 1912) is an American economist, winner of the 1976 Nobel Prize in Economics, awarded “for his research into consumption, the history and theory of money.” A native of New York, he graduated from Rutgers (1932) and Chicago (1934) universities. Until 1935 he was a research assistant at the University of Chicago, then became an employee of the National Resources Committee, and since 1937 - an employee of the National Bureau of Economic Research. In 1940 he taught at the University of Wisconsin, in 1941-1943. - employee of the Ministry of Finance as part of a group of tax researchers. From 1943 to 1946 he held the position of deputy director of the group of statistical studies of the military sphere at Columbia University, where he received his doctorate (1946).

In 1946 he returned to the University of Chicago as a professor of economics, remaining in this position to this day. And his world fame was brought, first of all, by his works on monetarist topics. These include a collection of articles published under his editorship, “Studies in the Field of the Quantitative Theory of Money” (1956), and a book, co-authored with Anna Schwartz, “History of the US Monetary System, 1867-1960” (1963). Friedman's monetary concept, in the words of the American economist G. Ellis, led to the “rediscovery of money” due to almost universally growing inflation, especially in the last period.

The name of M. Friedman, a Nobel laureate in modern economic theory, is usually associated with the leader of the “Chicago monetary school” and the main opponent of the Keynesian concept of state regulation of the economy. This became especially noticeable in those years (1966-1984) when he had the opportunity to write a weekly column in Newsweek magazine, which became, as it were, a propaganda mouthpiece for his monetarist theory.

Meanwhile, M. Friedman is multifaceted in his work and, which is very important, his scientific interests also cover the field of methodology of economic science. After all, for many years now, in their discussions on this problem, economists have not been able to do without analyzing Friedman’s essay “The Methodology of Positive Economics” (1953). As well as without essays on a similar topic written by L. Robbins (1932), R. Heilbroner (1991) and M. Allais (1990), or the famous lecture given by P. Samuelson at the ceremony of awarding him the Nobel Prize in Economics (1970 ), and etc.

However, it is precisely from M. Friedman’s positivist methodological essay that one can glean extraordinary judgments that economic theory as a set of meaningful hypotheses is accepted when it can “explain” factual data, only from which it follows whether it is “correct” or “wrong” and whether it will be "accepted" or "rejected"; that facts, in turn, can never “prove a hypothesis,” since they can only establish its fallacy. At the same time, his solidarity with those scientists who consider it unacceptable to present economic theory as descriptive rather than predictive, turning it into simply mathematics in disguise, is obvious. According to M. Friedman, to assert the diversity and complexity of economic phenomena means to deny the transient nature of knowledge, which contains the meaning of scientific activity, and therefore “any theory necessarily has a transient nature and is subject to change with the progress of knowledge.” At the same time, the process of discovering something new in familiar material, the Nobel laureate concludes, must be discussed in psychological rather than logical categories and, when studying autobiographies and biographies, stimulate it with the help of aphorisms and examples.

1.2 Velocity of money

The position of monetarists on the issue of the velocity of circulation of money is interesting. The variability of this indicator played an important role in the decline in the authority of quantity theory in the 30s. Modern monetarists recognize the possibility of sharp fluctuations in the speed indicator, for example, during periods of acute inflation.

Sometimes money moves very slowly. They are kept for a long time in the bank at home or in bank accounts, used only to pay for some purchase. If a period of inflation sets in, they try to spend money as quickly as possible, and it begins to change hands at breakneck speed. The concept of "money circulation velocity" was proposed at the beginning of the last century by Alfred Marshall of Cambridge University and Irving Fisher of Yale University. Using this concept, one can measure the speed at which money changes from one owner to another or circulates in the economy. If the quantity of money is large in comparison with the amount of expenditure, then the velocity of circulation will be low; if money turns around quickly, then its circulation speed will be high.

Thus, we define the velocity of money as the ratio of nominal GDP to the money supply. Velocity measures the rate at which the money supply circulates relative to total income or output. Formally it looks like this:

V ≡ GDP/M ≡ (p1q1 + p2q2...)/M ≡ PQ/M,

where P is the average price level; and Q is real GDP. The velocity of money (V) is defined as the annual nominal GDP divided by the quantity of money.

Velocity of money can be thought of as the rate at which money moves from one owner to another. Let's look at this with a specific example. Suppose that a country produces only bread and its GDP consists of 48 million loaves of bread, each of which sells for $1, which means that GDP = PQ = $48 million per year (i.e., if the volume of money mass is equal to 4 million dollars. Then, according to the definition, V = 48 million dollars / 4 million dollars = 12 times a year). This means that money turns over once a month, while the population spends its income on purchasing a month's supply of bread.

It should be noted that over the past one hundred and fifty years, the velocity of circulation of the M2 monetary supply has remained remarkably stable. At the same time, the circulation speed of M1 has increased significantly in recent years. The issue of stability and predictability of the velocity of money plays an important role in the development of macroeconomic policy.

1.3 Quantity theory of prices

Now let's look at how some economists who have worked on this problem in the past have used the "velocity of money" to explain the dynamics of the general price level. The basic assumption was that the velocity of money is relatively stable and predictable. According to monetarists, the reason for this stability is that the velocity of money reflects the distribution of income and expenses over a certain period of time. If people receive their income once a month and spend it evenly throughout that month, then the velocity of circulation will be 12 times a year. Even if the income of the population doubles, the price level rises by 20%, and GDP increases several times, this will not affect the temporary distribution of expenses in any way, the velocity of money circulation will remain unchanged. The velocity of money will only change when individuals or businesses change their spending patterns or the way they pay their bills.

This view of the state of affairs led classical economists, as well as some scientists, to use the concept of “velocity of circulation” to explain fluctuations in the price level. In accordance with this approach, known as the quantity theory of money and prices, we obtain the equation for the velocity of circulation

P = MV/Q- (V/Q)M = kM.

This equation follows from the money velocity equation already discussed by substituting the more compact k for V/Q and solving a new equation for P. Many classical economists believed that if the methods of payment for concluded transactions remain unchanged, then k is constant. In addition, their opinion was based on the assumption of full employment, which means that real output should increase smoothly and equal potential GDP. Combining these premises, we can say that in the short term k (= V/Q) remains practically unchanged, and in the long term it grows smoothly.

What conclusions can we draw from studying quantitative theory? As can be seen from the equation, if k is constant, then the price level changes in proportion to the money supply. If the money supply is stable, prices will be stable. If the supply of money increases, prices will rise accordingly. This means that if the money supply increases ten or a hundred times, the country will experience galloping inflation, or hyperinflation. Indeed, the quantitative theory of money is most clearly illustrated by hyperinflation. From Fig. 2 shows that prices in Germany in 1922-1924 increased a billion times precisely after its Central Bank launched the printing press. Before us is one of the principles of the quantitative theory (of course, not the most humane). To understand how the quantity theory of money works, it is important to remember the fact that money is fundamentally different from ordinary goods such as bread or cars. We buy bread as food and cars as personal means of transportation. If prices in Russia today are a thousand times higher than they were a few years ago, then it is only natural that people now need a thousand times more money to buy the same amount of goods as they did in the past. This is the essence of the quantity theory of money, the demand for money increases in proportion to the price level.

The quantity theory of money and prices states that prices change in proportion to the money supply. Although this theory is only a rough approximation of reality, it helps explain why countries where the money supply increases slowly have moderate inflation, while countries where the money supply grows quickly experience runaway inflation.

2. Modern monetarism

Modern monetarist economics emerged after World War II. Monetarists challenged Keynesianism by emphasizing the importance of monetary policy in stabilizing the economy at the macro level. About twenty years ago, a split occurred in the monetarist movement. One part of it remained faithful to the old tradition, while the other (younger) turned into an influential new classical school, the views of which we will analyze below.

The monetarist approach is based on the assertion that growth in the money supply determines the size of nominal GDP in the short run and the price level in the long run. Adherents of this approach carry out their research within the framework of the quantitative theory of money and prices, taking into account the results of an analysis of trends in changes in the velocity of circulation of money. Monetarists believe that the velocity of money is stable

(or at most constant). If this premise is true, it is significant because the quantity equation shows that if V is constant, then changes in M ​​will cause proportional changes in PQ (or nominal GDP).

2.1 The essence of monetarism

Monetarism, like all other schools, has its own characteristics. Here are several theses that occupy a central position in monetarist theory.

· The growth rate of the money supply is the main factor in changes in nominal GDP. Monetarism is one of the main theories that studies the factors that determine aggregate demand. According to this approach, nominal aggregate demand primarily depends very much on the supply of money. Fiscal policy is very important in terms of only some aspects, such as how much of GDP will be allocated to military spending or private consumption. And the main macroeconomic variables (total output, employment and price level) depend mainly on the quantity of money. This state of affairs in a simplified form can be formulated as follows: “Only money matters.”

What is the monetarists’ belief in the primacy of money based on? It relies on two assumptions. First, as Friedman writes: “There is an extraordinary stability, confirmed by research, characterizing the regularity of such quantities as the velocity of circulation of money, which will be of interest to any specialist working with data characterizing the circulation of money.” Second, many monetarists typically claim that the demand for money is completely unresponsive to changes in interest rates.

Let's look at why these assumptions lead to these conclusions. According to the quantitative equation, if the velocity of circulation (V) is stable, then M will be the only factor determining PQ, i.e. nominal GDP. Likewise, fiscal policy, according to monetarists, is not effective, since if V is stable, then the only force that can influence PQ is M. Thus, with a constant value of V, taxes and government spending have no chance of having any effect. or influence on the development of events.

· Prices and salary rates are relatively flexible. One of the main provisions of Keynesianism is related to the “slow mobility” of prices and wages. Despite this, monetarists believe that prices and wages have a certain inertia, and argue that the Phillips curve slopes relatively steeply even in the short run, and also insist that it is vertical in the long run. Within the AS-AD model, according to monetarists, the short-term AS curve is quite steep. The monetarist approach combines the two previous points. Since money is the main factor in nominal GDP, and prices and wages are relatively flexible as they approach potential output levels, money has a small and short-term impact on real output. M affects mainly R.

This means that money can have some impact on output and prices, but in the short run. In the long run, due to the fact that the economy tends to remain at full employment, money can only have the greatest impact on the price level. Fiscal policy has little impact on production and prices, both in the short and long term. This is the essence of the monetarist doctrine.

· Stability of the private sector. Finally, monetarists believe that the private sector of the economy, left without government control, will not be prone to instability. On the contrary, fluctuations in nominal GDP are usually the result of government activities, especially changes in the money supply, which depend on the policies pursued by the Central Bank.

2.2 Monetarism and Keynesianism

What is the difference in the views of monetarists and supporters of Keynesian theory? In fact, after the rapprochement that has occurred over the past three decades, there are no major disagreements between these schools, and the disputes between them now concern more the placement of emphasis than fundamental differences.

However, we can identify two main differences.

Firstly, among representatives of the two schools there is no unity regarding the forces that influence aggregate demand. Monetarists believe that aggregate demand is influenced solely (or mainly) by the supply of money and that this influence is stable and predictable. They also believe that fiscal policy or autonomous changes in spending, unless accompanied by changes in the quantity of money, have little effect on output and the price level.

Keynesians, on the contrary, are of the opinion that everything is much more complicated. While they agree that money has a significant influence on aggregate demand, output and prices, they argue that other factors are also important. In other words, Keynesians believe that money has a certain influence on output, but no more than such variables influencing the level of aggregate spending as fiscal policy and net exports. They also point to good evidence that V systematically increases as interest rates rise, and therefore holding M constant is not sufficient to ensure constant nominal or real GDP. One of the most interesting examples of the convergence of the views of Keynesians and monetarists is their belief that stabilization policy can achieve its goals through a more active use of monetary policy instruments.

The second point of contention among monetarists and Keynesians is the behavior of aggregate supply. Keynesians insist on the inertia of prices and wages. Monetarists, on the other hand, believe that Keynesians exaggerate the sluggishness of prices and wages and that the short-run AS curve has a much steeper slope than Keynesians claim, although it may not be vertical.

Disagreement over the slope of the AS curve has led to the two schools of thought having different views about the impact of changes in aggregate demand in the short run. Keynesians believe that a change in (nominal) demand leads in the short run to a significant change in output with little change in the price level. Monetarists argue that a shift in the aggregate demand curve, as a rule, ends with a change in the price level, and not in the volume of production.

The essence of monetarism is that all the attention of representatives of this school is focused on the special role of money in determining aggregate demand. It is also important that, in their opinion, wages and prices are relatively flexible.

3. Monetarist approach. Constant growth rate of money supply

Monetarism has played a significant role in shaping economic policy over the past forty years. Monetarists often support the ideas of a free market and a policy of non-interference by the state in the activities of enterprises at the micro level. But their most significant contribution to macroeconomic theory is associated with the proposal to follow the constant rules of monetary circulation, rather than rely on strong-willed fiscal and monetary policies.

In principle, monetarists might advise resorting to monetary policy instruments to achieve the necessary regulation of the economy. But they decided to settle on the assumption that the private sector is quite stable and that instability in the economy is usually introduced by the government. Moreover, monetarists believe that money affects output only with a significant lag, the magnitude of which can vary, so the development of an effective stabilization policy sometimes takes a long time.

Thus, a key element of monetarist economic philosophy is the monetary rule: effective monetary policy should be used to maintain a constant rate of growth in the money supply under all economic conditions.

What is this approach based on? Monetarists believe that fixed growth rates of the money supply (3-5% per year) would eliminate the main source of instability in the modern economy - unpredictable changes in monetary policy. If, instead of the Fed, some computer program was used that would always monitor the maintenance of a fixed growth rate M, then the problems associated with fluctuations in the volume of the money supply would disappear. If the velocity of money was stable, nominal GDP would increase at a constant and constant rate. And if the money supply also increased at the same rate as potential GDP, then soon stable prices would become the norm of our life.

3.1 What monetary policy can do

Monetary policy cannot fix real indicators at a certain level, but it can have a serious impact on them. And one does not contradict the other at all.

It is true that money is only a mechanism, but it is a highly efficient mechanism. Without it, it would not have been possible to achieve those amazing successes in the growth of production and living standards that have occurred over the past two centuries - no other wonderful machine could have so painlessly and with little effort finally put an end to our village life.

But what distinguishes money from other machines is that this machine is too capricious and when it breaks down it sends all other mechanisms into convulsions. The Great Depression is the most dramatic, but not the only example of this. Any inflation was a consequence of money creation, which was resorted to during the war to cover unsatisfied demand in addition to explicit taxes.

The first and most important lesson that history teaches, the lesson perhaps the most instructive, is that monetary policy can divert money from being the main source of economic trouble. This sounds like a warning to avoid making big mistakes, and to some extent it is. The Great Depression might not have happened, and if it had happened, it would have been much milder if the financial authorities had not made mistakes or had not had in their hands such powerful tools as were at the disposal of the Federal Reserve System at that time.

Even if the recommendation not to make money the source of economic disruption were entirely negative, it would not do much harm. Unfortunately, it is not entirely negative. The monetary machine also failed when the central authorities did not have the power that is concentrated in the hands of the Federal Reserve System. In the history of the United States, the episode of 1907 and the banking panics of earlier periods are examples of how the money machine can break down on its own. Therefore, financial institutions are faced with a necessary and important task: to make such improvements to it that would minimize its occasional failures and allow them to extract the greatest benefit from it.

The second task of monetary policy as the basis of a stable economy is to keep the machine, to use Mill's analogy, well oiled. An economic system will function well when producers and consumers, employers and wage workers have full confidence that the average price level will behave in a predictable manner in the future: best of all, remaining stable. Given any conceivable institutional constraints, there is only very limited mobility of prices and wages. This degree of flexibility must be maintained to allow for the relative fluctuations in prices and wages that are required to accommodate progressive changes in technology and tastes. Governments should not strive to achieve some absolute price level, which in itself has no economic function. In earlier times, confidence in the stability of money was associated with the gold standard, and in its heyday it served this purpose quite successfully. Of course, these times can no longer be returned, and there are only a few countries left in the world that are ready to afford the luxury of the gold standard - there are good reasons to abandon it. Financial institutions actually resort to a kind of surrogate for the gold standard when they fix exchange rates, responding to fluctuations in the balance of payments solely by changing the volume of the money supply, without caring at all about the “sterilization” of surpluses and deficits and without resorting to exchange rate control, openly or covertly. currency or the introduction of tariffs and quotas. Again, although many central banks are talking about this possibility, few would actually want to pursue this course, and it is not innocuous reasons that make most refrain from such a step. The fact is that such a policy puts the country under the power not of an impersonal machine in the form of a gold standard, but of financial authorities that can act both deliberately and spontaneously.

In the modern world, if monetary policy is entrusted with ensuring the stability of the economic foundation, its power should be used with the utmost caution.

And one last thing. Monetary policy can, to a certain extent, neutralize the strongest disturbances affecting the economic system from the outside. For example, if there is a natural long-term revival of the economy - this is how apologists of secular stagnation characterized the post-war development - monetary policy, in principle, can help maintain growth in the money supply at a level that cannot be achieved with other instruments. Or, say, when a bloated federal budget threatens to run into unprecedented deficits, monetary policy can quell inflation fears by keeping money supply growth lower than some would otherwise desire. This means a temporary increase in interest rates, which is likely to have a very painful impact on the budget now, but will enable the government to obtain the necessary loans to finance deficits, and this, in turn, will prevent the acceleration of inflation and, therefore, definitely promises both lower prices and lower discount rates. Finally, if the end of a war requires a country to shift resources to peaceful production, monetary policy can facilitate the transition by recommending an increase in the rate of money growth above that required for normal conditions, although experience is not encouraging because this can be taken too far.

monetarism money supply price

3.2 How monetary policy should be conducted

How should monetary policy be conducted to ensure that it actually achieves its objectives when it can?

The first recommendation is that financial authorities should monitor those parameters that they can control, rather than those that they cannot. If, as often happens, the authorities take as a direct criterion the value of the discount rate or the level of current unemployment, then they are likened to a spaceship aimed at a non-existent, false star. Then it doesn’t matter how sensitive and smart the navigation equipment is, the ship will still go off course. It's the same with the authorities. Among the various parameters that they can control, the most attractive benchmarks are the exchange rate, the price level given by one or another index, and the total amount of money - cash plus demand deposits, or this amount increased by the amount of time deposits, or whatever. then an even wider monetary aggregate.

Among the three named indicators, the price level is rightfully the most important. All other things being equal, it does represent the best alternative. The connection between the actions of financial authorities and the price level, and it undoubtedly always takes place, is more indirect than the connection of their policies with any monetary aggregate. In addition, the consequences of monetary actions on prices appear after a longer period of time than the reaction to a change in the quantity of money, and the time lag and the magnitude of the effect in both cases depend on the circumstances. As a result, it is impossible to accurately predict exactly what effect this or that government move may have on the price level and whether it will lead to any effect at all. An attempt to directly control prices through monetary policy can obviously turn the policy itself into a source of disturbance, since errors in the choice of starting and stopping points are possible. Perhaps with progress in our understanding of monetary phenomena the situation will change, but today a more circuitous path to the goal seems more reliable. Therefore: the volume of the money supply is the best direct criterion of monetary policy currently available, and this conclusion is more important than the specific choice of one or another of the monetary aggregates as a guide.

The second recommendation is to avoid sudden movements in monetary policy. In the past, financial authorities have proven their ability to move in the wrong direction. More often than not, however, they chose the right direction, but were either late or moved too quickly, which was their main mistake. For example, in early 1966, the US Federal Reserve began to pursue the correct policy of slowing monetary expansion, although this should have been done a year earlier. And having started to move in the right direction, it did it too quickly, making the sharpest jump in the rate of change in the money supply in the entire post-war period. And again, having gone too far in this direction, the Fed had to reverse course at the end of 1966, but it again missed the optimal point and not only did not return, but also exceeded the previous rate of growth of the money supply. And this episode is no exception - similar things happened in 1919-1920, 1937-1938, 1953-1954 and 1959-1960.

The reason for these overlaps is obvious - the time gap between the actions of financial authorities and the consequences of their actions in the economy. The authorities are trying to catch these consequences of the state of the economy today, but they appear only after six, or nine, or twelve, or even fifteen months. Therefore, they are forced to react too harshly to every jump up or down.

The rapid adaptation of society to a publicly announced and firmly pursued policy of constant growth of the money supply constitutes the main achievement of financial authorities, if they follow this course steadily, avoiding sharp deviations. It is important to keep in mind that periods of relatively stable money supply growth have also been periods of relatively stable economic activity, both in the United States and in other countries. On the contrary, periods of sharp changes in the money supply were periods of large fluctuations in economic activity.

By strictly adhering to the adopted course, financial authorities are doing the best they can to maintain economic stability. If this is a course for constant but moderate growth of the money supply, then this is a reliable guarantee of the absence of both inflation and price deflation. Other forces, of course, can influence economic processes, disturbing their smooth flow and requiring adaptation to changing conditions, but the constant growth of the money supply will provide a favorable environment for the manifestation of such enduring factors as enterprise, ingenuity, perseverance, search, frugality, which are the spring economic development. And this is the most that can be demanded from monetary policy at the current level of our knowledge. But this “more,” as is now clear to everyone and which is important in itself, is quite achievable.

3.3 Monetarist experiment

Monetarist views gained popularity in the late 1970s. In the US, many thought that Keynesian stabilization policies had failed by failing to control inflation. As inflation began to climb into double digits in 1979, many economists and policymakers began to believe that the only hope for controlling inflation lay in monetary policy.

In October 1979, the new chairman of the Federal Reserve System, Paul Volcker, announced that it was time to get rid of inflation. This event was later called the monetarist experiment. In a radical restructuring of the Fed's operations, it was decided to shift the focus from regulating interest rates to a policy of maintaining bank reserves and the supply of money along a predetermined growth trajectory.

The Fed's leadership hoped that by limiting the amount of money in circulation, it could achieve the following results. First, such activity would cause interest rates to rise sharply, which would reduce aggregate demand, increase unemployment, and slow wage and price growth through the mechanism described by the Phillips curve. Second, tight and credible monetary policy will help reduce inflation expectations, especially those embedded in labor agreements, and signal the end of the period of high inflation. If expectations associated with high inflation change, the economy will move into a phase of relatively painless decline in “core” inflation rates.

This experiment was highly successful in slowing economic growth and reducing inflation. As interest rates rose as a result of low money growth, interest rate-sensitive spending slowed. As a consequence, real GDP growth stalled between 1979 and 1982, and the unemployment rate rose from less than 6% to its peak of 10.5% at the end of 1982. The rate of inflation has fallen sharply. All doubts about the effectiveness of monetary policy disappeared. Money works. Money matters. But this does not mean that only money matters!

What about the monetarists' claim that tight and credible monetary policy should be regarded as a low-cost anti-inflationary strategy? Numerous studies of this issue over the past ten years show that tight monetary policy works, but the costs of its implementation are quite high. From the point of view of production and employment, the economic sacrifices of monetarist anti-inflationary policies were almost as great (per point of disinflation) as the costs incurred by implementing other methods of anti-inflationary policies. Money works, but does not create miracles. There are no free breakfasts on the monetarist menu.

3.4 Declining popularity of monetarism

Oddly enough, it was the successful completion of the experiment conducted by the monetarists to eradicate inflation in the American economy, as well as the changes that occurred in the financial markets, that caused such a change in the behavior of economic variables that destroyed the initial premises of the monetarist approach. The most significant change that occurred during the monetarist experiment (and even after its end) was the change in the behavior of the velocity of money. Recall that monetarists believe that the velocity of money is relatively stable and predictable. This stability allows, by changing the money supply, to smoothly change the level of nominal GDP.

But it was precisely after the recognition of the monetarist doctrine that the velocity of money circulation became extremely unstable. In fact, the M1 circulation rate changed more in 1982 than in the previous few decades (Figure 4). The high interest rates that established during this period gave rise to various innovations in the financial sector and an increase in the number of owners of checkable deposits that generate interest income. As a result, the velocity of money became unstable after 1980. Some economists believe that the velocity of money lost its stability because expectations were placed too high on monetary policy during that period.

As the velocity of money became increasingly unstable, the Federal Reserve gradually abandoned its use as a guide for its monetary policy. By the early 1990s, it focused primarily on trends related to output, inflation, employment and unemployment, and used them as key indicators of the health of the economy. In fact, in 1999, in the minutes of the Federal Open Market Committee, when describing the state of the economy or when explaining the reasons for the committee's adoption of certain short-term measures, the term “money velocity” does not appear at all.

However, none of these trends detracts from the importance of money as an instrument for carrying out certain macroeconomic policies. In essence, monetary policy is now a very important macroeconomic policy tool used to manage business cycles in the United States of America and Europe.

Despite the fact that monetarism is no longer in fashion in our time, monetary policy continues to be an important tool of stabilization policy in the economies of the leading countries of the world.

Conclusion

In conclusion, the following conclusions must be drawn:

1. Monetarists argue that the supply of money is the main factor in the short-term fluctuations of real and nominal GDP, as well as the long-term dynamics of the latter.

2. Monetarist theory is based on the analysis of trends in the velocity of money, which allows us to understand the importance of money in the economy.

Despite the fact that the V value is clearly not constant (even due to the fact that it changes along with changes in interest rates), monetarists believe that its fluctuations are regular and predictable.

3. From the definition of the velocity of money we can derive the quantity theory of prices.

In the quantity theory of prices, P is considered to be almost strictly proportional to M. This view is quite useful in explaining hyperinflation and some long-term trends, but it should not be taken literally.

4. Monetarist theory is based on three main assumptions: the growth rate of the money supply is the main factor in the growth rate of nominal GDP; prices and wages are relatively flexible; and the private sector of the economy is stable. This suggests that macroeconomic fluctuations arise mainly from disturbances in the money supply.

5. Monetarism is usually associated with the “free market”, “policy of non-intervention by the state”. In an effort to avoid active government intervention in the economy, considering the private business sector to be internally stable, monetarists often propose setting a constant rate of growth of the money supply at approximately 3-5% per year. Some of them believe that this will ensure sustainable economic growth and price stability in the long term.

6. The Fed conducted a large-scale monetarist experiment in 1979-1982. The experience has convinced the greatest skeptics that money is a powerful factor in aggregate demand and that short-term fluctuations in the money supply affect output more than prices. However, according to Lucas's criticism, the velocity of money may be quite unstable if the monetarist approach is put into practice.

List of used literature

1. Bunkina M.K. “Monetarism”, Moscow, JSC “DIS”, 1994.

2. Bartenev S.A. “Economic theories and schools”, Moscow, “BEK”, 1996.

3. Semchagova V.K. “Finance, money circulation and credit”, Moscow, 1999

4. Usoskin V.M. “The Theory of Money”, Moscow, “Mysl”, 1976.

5. Friedman M. “If money could talk...”, Moscow, “Delo”, 1999.

6. Yadgarov Y.S. “History of economic doctrines”, Moscow, “Economy”, 1996.

7. Paul E. Samuelson, William D. Nordhaus “Economics”, Moscow, “William”, 2007.

8. McConnell Campbell, Brew Stanley "Economics", 2007.

1. Neoclassical school. M. Friedman and his theoretical approaches
2. Monetary and economic policy according to Friedman
3. Monetarism and modern economic practice
4. Market system and state system according to Friedman

1. Neoclassical school. M. Friedman and his theoretical approaches

The appearance of Keynes’s “General Theory of Employment, Interest and Money” seemed to solve many of the problems of our time - the work indicated the causes of macroeconomic instability and economic crises, and substantiated ways to maintain economic growth and the proper organization of investment and monetary policies. And even in political terms, Keynesianism was the bridge that reliably connected the market and socialist economies with the simple principle of “more or less state” in regulatory processes. Keynesianism, thus, fit harmoniously into the socio-political doctrine of convergence, that is, the theory of the gradual rapprochement of the market and socialist systems.

Such approaches were ideologically alien and unacceptable to orthodox supporters of the “free market” with its “invisible hand of Providence”, which automatically restores economic balance and social justice. Followers of the early classics represented by A. Smith, T. Malthus, J.B. Say, and then their ideological successors in the 19th and 20th centuries. – K. Menger, O. Boehm-Bawerk, A. Marshall, A. Pigou began to actively criticize the Keynesians, while developing updated theoretical concepts, collectively called the neoclassical school.

The most popular and theoretically justified is now the Chicago school of economics - the school monetarism. The second most important concept, also gaining momentum, was the doctrine of supply-side economics (supply-side economics), which can also without exaggeration be attributed to one of the areas of the neoclassical school. Let us dwell on a brief analysis of monetarism.

The recognized leader of the neoclassical school is considered Milton Friedman(1912-2006), winner of the Nobel Prize in Economics for 1976, professor at the University of Chicago. Coming from a family of emigrants, Friedman became a respected scientist in his new homeland with the firm conviction that the free US economy is the best in the world, where everyone can self-realize in accordance with the socially approved motto “self made man.” Friedman devoted his entire life to upholding the principles of liberalism in economic and political life, and his works are imbued with disgust for totalitarianism and restrictions on human rights.

While working at the National Bureau of Economic Research, M. Friedman studied US monetary policy for a long time and came to the conclusion that money is the quintessence of the economic system; in fact, they are the only ones that matter. Hence the name of this economic school – monetarism. By regulating the amount of money in circulation, it is possible to achieve changes in the behavior of economic entities.

Friedman based his reasoning on the basic position of I. Fisher’s quantitative theory of money, according to which a change in the amount of money in circulation leads to a proportional change in prices;

MV = P·Q,

where M is the amount of money in circulation;

V – velocity of money circulation;

P – average price level;

Q is the quantity of goods and services circulating in the economy.

It is believed that V and Q are relatively constant quantities, and M and P are variable. If we introduce the coefficient k = Q/V, we can write:

M =kP.

From the last expression it follows that the mass of money in circulation and the average price level are directly proportional to each other.

By complicating the Fisher equation by introducing additional economic variables into it - such as the interest rate on bonds, income on stocks, the rate of change in the price level and some other parameters, Friedman derived his equations, which differed significantly from the interpretations of the Keynesians.

According to Friedman, the main reason for changes in nominal (i.e., expressed in money) income is a change in the amount of money in circulation. Moreover, the relationship between changes in the quantity of money and nominal income manifests itself with a certain time lagom(i.e. delay). If the quantity of money decreases, output decreases after 6-12 months, then after a gap between actual and potential output appears, a decrease in the price level follows, usually after another 6-12 months. Thus, the lag is from 1 to 2 years. The same lag exists between changes in the quantity of money and the value of bank interest. At the same time, an increase in the amount of money initially reduces the interest rate, since owners of “extra” money seek to get rid of it by purchasing bonds. With a constant number of bonds, their price increases while the bank interest rate decreases. Some of the “extra” money will be used to purchase other types of securities, investment and consumer goods, which stimulates the growth of business activity.

During the adaptation period of 1-2 years, the market system reaches a state of dynamic equilibrium of markets. Business activity increases, which in turn causes an increase in the mass of goods, which absorbs excess money in circulation. From the above reasoning it follows that the basis of economic regulation is the management of the mass of money in circulation.

2. Monetary and economic policy according to Friedman

Based on Fisher's quantitative equation, monetarists derive the principle of the neutrality of money: the balance between the commodity and money supply does not create inflation, on the one hand, and does not restrain economic growth, on the other. In other words, the money supply must expand at the same rate as the growth rate of real GDP. Even the rapid growth of money supply is nothing to worry about. The government can use quantitative easing programs to stimulate economic activity.

Money in circulation is created through the government issue of banknotes, non-cash funds and through the issuance of money by banks at the current interest rate. Moreover, the banking system issues money to two types of borrowers: the state and the private sector.

The public sector's need for cash may or may not lead to the creation of new money. If the state resorts to increasing taxes to cover the budget deficit, then money is not created. If it takes out loans, then new money appears.

We will explain the process of the emergence of new money using the following example (this process is called bank multiplier). Let a deposit of $1,000 be made to the bank. Let’s say the required reserve ratio at the Central Bank is 20%. The bank, naturally, does not keep the money, but seeks to lend it to entrepreneurs or purchase income-generating securities. Thus, $200 is deposited into the required reserve account with the Central Bank, and $800 is used to purchase securities or issue loans. These $800, in turn, go to other banks, which we will call second-tier banks. They also hand over 20% of the money in the form of required reserves of $800 (ie $160) and use the rest for business purposes. So the process will continue until, on the 25th circle, the entire amount is dissolved in the many stages of banks:

1000 + 800 + 640 + … = $5000,

those. the resulting value can be considered as a bank multiplier, which will be equal to

M b = 1 / (1 –m) ,

where m is a value depending on the required reserve rate; m = n – 1; n – redundancy factor. With a required reserve rate of 20% (n = 0.2), the bank multiplier will be equal to

M b = 1 / (1 – 0.8) = 5.

The second factor leading to the creation of money is private sector borrowing. The exchange rate of national currency for foreign currency also has a decisive influence on the amount of money in circulation.

Payment balance. Methods for regulating the balance of payments usually come down to three groups of measures:

1. Direct control, involving export-import quotas, customs tariffs, licenses, restrictions on capital migration;
2. Inflationary and deflationary measures of the government along with changes in the refinancing rate;
3. Change in fixed exchange rate, i.e. devaluation or revaluation.

As a rule, the reasons for a chronic balance of payments deficit (i.e., an excess of imports over exports, and as a result, the outflow of foreign currency abroad) lie in the general inefficiency of the national economy and the weak competitiveness of manufactured products on the world market. The least effective measure for regulating the balance of payments is to establish direct control over foreign economic transactions. In this case, economic backwardness is preserved, and a temporary improvement in the balance of payments is achieved solely through restrictive measures.

According to monetarists, a balance of payments deficit indicates that national enterprises produce uncompetitive products and the economy consumes too many imported goods. In order to prevent this process, strict control over the amount of money in circulation is necessary. By reducing the amount of money in circulation, the state ensures that economic entities begin to spend money more selectively and economically. In such conditions, low-competitive products are practically not in demand and the enterprises producing them are closed or modernized. After a certain period of time, this process leads to economic recovery and increased exports. The overall efficiency of the economy and foreign economic relations will increase significantly due to the increased competitiveness of national products. Thus, the economic system is “cleansed” of unprofitable production, and the balance of payments deficit disappears by itself.

Deregulation of the balance of payments helps the economy independently get rid of excess money in circulation. A favorable factor is the introduction of a floating exchange rate. The formation of the exchange rate is based on such elements of the economic system as the price level, wages, labor productivity and employment levels. In a market economy, the value of these parameters is not constant. As a result, inevitable deviations of the fixed exchange rate from the real one lead to complications in the balance of payments, which forces the government to introduce direct control over foreign economic transactions, which leads, according to Friedman, to the transformation of a market economy into an authoritarian one.

Taxes. M. Friedman actively opposes government measures to redistribute income through progressive taxation. These measures discourage people from engaging in highly taxed activities that typically involve significant risk and financial inconvenience. At the same time, these measures force people to look for various loopholes in the legislation in order to reduce taxes. As a result, actual tax rates turn out to be significantly lower than nominal ones and the distribution of the tax burden becomes arbitrary and unequal. Individuals with the same economic situation pay very different taxes depending on the source of their income and the opportunities they have for tax evasion. Friedman notes that he finds no justification for a system of progressive taxation introduced solely for the purpose of redistributing income. This seems to Friedman to be a typical case of violence to take from one and give to another, which is directly contrary to individual freedom.

Monopolies. Friedman identifies three types of monopolies:

• Monopoly in industry. Looking at the US economy, he notes that the scale of activity of these monopolies is insignificant. The automobile industry is usually cited as an illustration of the degree of monopoly in the United States. However, wholesale trade is twice as large as automobile manufacturing and it is extremely difficult to identify the leading companies in it. Additionally, the industry is highly competitive;
• Monopoly of trade unions. Friedman sees a significant difference between industrial and trade union monopoly in the fact that while over the past half century there has been virtually no tendency to increase the scale of industrial monopoly, trade union monopoly has continued to grow;
• Government and government supported monopoly, such as postal services, largely electricity generation, etc.

Friedman identifies three main factors leading to the emergence of monopolies.

The first of them combines technical considerations (for example, in a small city it is advisable to have only one water supply system). In this case, the problem of technical monopoly does not have a satisfactory solution. There are three options to choose from: private and unregulated monopoly; a private monopoly regulated by the state; and a monopoly under government control. Friedman believes that the lesser evil is a private, unregulated monopoly. This conclusion is based on the assumption that it is this kind of monopoly, unlike other types of monopolies, that may be undermined by dynamic changes in the economy.

Friedman names direct and indirect government support as the second source of the emergence of monopolies. Examples of such support are tax breaks, subsidies and exclusive rights. Government support, in his opinion, leads to inefficient use of capital.

Private collusion is considered as a third source of monopoly formation. Conspiracy-based private cartels , as a rule, are unstable and short-lived unless they can gain government support. As a result of the necessarily arising divergence of interests of cartel members, there is always some kind of renegade and the cartel falls apart.

To overcome the phenomena of monopoly, the government, Friedman believes, must decide on a number of measures to eliminate state support for business or trade union monopoly. Both must comply with antitrust laws.

Inflation. A special place in monetarist theory is occupied by the problem of combating inflation. According to Friedman, inflation is a monetary phenomenon, and the fight against it is possible only in the sphere of monetary circulation. There is a relationship between the demand for money and the amount of money in circulation. When the quantity of money exceeds the demand for it, an imbalance occurs. The private owner will seek to reduce the monetary assets he holds. However, this desire is only feasible if the other owner agrees to purchase them. There will be significantly more people trying to get rid of money than buyers. The general level of income and expenses will increase, prices will rise at the real cost of cash.

According to monetarists, inflation occurs when the rate of growth in the quantity of money exceeds the rate of growth of the economy. In the initial period, the population does not expect long-term price increases and views each price increase as temporary. Economic entities continue to store the amount of cash necessary to maintain their needs at their usual level. However, if prices continue to rise, then the population begins to expect further price increases. As the purchasing power of money decreases, it becomes an expensive way to store assets, and people will try to reduce the amount of cash they hold. This raises prices, wages and nominal incomes. As a result, real cash balances continue to decline. At this stage, prices rise faster than the quantity of money. If the growth rate of the money supply stabilizes, then the rate of price growth will also stabilize. Moreover, an increase in the general price level may show different relationships with an increase in the quantity of money. With moderate inflation, prices and money supply generally increase at the same rate. With high inflation, prices rise several times faster than money circulation, leading to a decrease in real income.

Based on this explanation of the inflation mechanism, Friedman also offers a number of tools that allow influencing it. First of all, it is necessary to reduce the amount of money in circulation. Moreover, specific actions can be very different depending on the conditions: increasing the number of securities, deregulating the balance of payments, reducing government spending, etc.

As economic entities adapt to new conditions, forces aimed at reducing inflation will come into play on their own (market forces will help equalize the money supply and the quantity of goods).

All this should lead to a reduction in production volumes, and then to a decrease in the rate of price growth. A state of economic equilibrium will arrive, which is a prerequisite for the start of economic growth.

Criticism of the Phillips curve. The curve first appeared in 1958, when the English economist Alban Phillips empirically derived the relationship between the annual percentage change in wages and the share of unemployed in the total labor force in England during 1861-1913. The main conclusion from Phillips curve analysis is that price stability and full employment are incompatible, conflicting goals; a decrease in unemployment is achievable only with an increase in inflation, and a decrease in inflation implies an increase in the number of unemployed.

Keynesians argued that there is always a reasonable compromise between the choice of inflation and unemployment, which gives the government greater opportunities to choose an acceptable policy course (for example, point P 3 and U 3 in Fig. 1).

Let the initial unemployment level correspond to the price growth rate P 1 . Let's also assume that this unemployment rate is considered too high by the government. To reduce it, it is necessary, according to Keynesian recipes, to implement a number of monetary and fiscal measures to stimulate demand. As a result, production will increase and new jobs will be created. The unemployment rate will fall to U 2 , but at the same time inflation will increase - the rate of price growth will increase to P 2 . Worsening inflation and depreciation of money may cause concern in financial and economic circles, and this will force the government to take measures to cool the economy by introducing credit restrictions, cutting budget expenditures, etc. Prices will fall to P 3, but at the same time it will be necessary to sacrifice high employment and increase unemployment to U 3.

Among the most severe critics of the Keynesian interpretation of the Phillips curve is M. Friedman, who in his article “The Role of Monetary Policy” denies the existence of a constant trade-off between inflation and unemployment. In particular, Friedman rejects the most important element of Keynesian doctrine - the theory of “involuntary” unemployment, which organically follows from the inherent lack of effective demand in capitalism. Monetarists, based on their interpretation of a system that automatically ensures the maximum level of production and employment, believe that unemployment is voluntary and is the result of the free choice of people. They argue that if fired people changed their profession, moved their place of residence, or accepted lower wages, they would find work. Here we see a typically neoclassical approach.

3.Monetarism and modern economic practice

In the 1970s, in developed countries with market economies, there was a gradual shift away from Keynesian methods of regulating the economy to monetarism. The interweaving of structural, cyclical and energy crises led to the emergence of a number of problems for which Keynesian theory had no answer. Traditional measures to strengthen government regulation have not had a positive effect.

State social programs contributed to the emergence of a paradoxical situation in the labor market, in which the amount of unemployment benefits approached the minimum wage rate. Attempts to completely eliminate unemployment led to an unjustified expansion of social programs at the expense of the state budget. High tax rates, in turn, hampered entrepreneurial activity and led to a reduction in investment.

According to the conclusions of Friedman's economic theory, the dynamic equilibrium in which the economies of Western countries were in the post-war period was disrupted as a result of the lifting of restrictions on foreign exchange transactions and the rise in prices for oil and petroleum products in 1973. The increase in fuel prices that followed the energy crisis, led to an increase in the cost of its purchase and at the same time to the influx of a huge amount of money from oil-exporting countries that were unable to invest it in their economies.

The increase in total cash expenditures and income led to higher prices. The forced structural restructuring, which ensured zero economic growth rates for a long period of time, led to the emergence of the phenomenon stagflation(i.e. inflation with a stagnant economy).

Stagflation, in turn, led to an increase in unemployment (up to 12% of the working population). The implementation of social programs required significant government financial resources, which were obtained through the growth of public debt and partly through new emissions. The situation was aggravated by the fact that a lot of enterprises were unprepared to work in conditions of constant high inflation and, accordingly, required growing budget allocations. At the same time, the cessation of their funding meant an aggravation of the unemployment problem.

In the current situation, increasing the amount of money in circulation to stimulate economic growth would mean increasing inflation, which was already out of control. Therefore, the crisis had to be overcome gradually, starting with a tough financial policy. The initial anti-crisis measure was to reduce the amount of money in circulation and increase the efficiency of enterprises by depriving them of government support as much as possible.

The recipes of monetarism and supply-side economics were tested in the United States starting in 1979, which were embodied in the economic policy known as Reaganomics. A sharp reduction in tax rates on business income, the curtailment of social programs and other government spending have reduced the centralized redistribution of income. The economic recession that began in accordance with Friedman's model in 1980 gave way at the end of 1982 to economic recovery.

Attempts to apply the conclusions of the theory of monetarism to transitional post-socialist economies have yielded different results. Thus, the “shock therapy” carried out in Poland by L. Balcerowicz generally yielded positive results (however, the unemployment rate in Poland during economic reforms reached 18-19%). Economic reforms along the lines of monetarism by General A. Pinochet in Chile can also be considered not entirely successful.

As for Russia, E. Gaidar’s attempt to use the principles of monetarist policy in reforming economic relations encountered strong political opposition. In addition, it should be noted that in the post-socialist economy of Russia there were almost completely no market institutions, monopolization and militarization of the economy assumed a total character, and the population, accustomed to state tutelage, lacked market psychology. It is also necessary to emphasize that in transition economies the crisis takes on a systemic character, i.e. A whole complex of factors turns out to be interconnected - political, economic, social.

Speaking about the use of monetarism in world practice, it is impossible to give an unambiguous assessment of the effectiveness of its use. There are many states that have liberalized their economic policies as much as possible and have encountered a lot of difficulties along the way. It is obvious that Friedman’s statement is true that the principle of free enterprise is a necessary, but far from sufficient condition for economic progress.

4. Market system and state system according to Friedman

According to his political views, Friedman is a supporter of the idea of ​​free enterprise, rightly believing that there is a direct relationship between economic freedom and personal freedom. Therefore, he opposes government intervention in the economy, since the market is a self-regulating entity, the normal functioning of which is disrupted by any external influence. Friedman's views on the political system can be found by reading his books Capitalism and Freedom and Freedom, Equality and Egalitarianism.

According to representatives of the Chicago School, the state should not be allowed to create wealth or regulate production volumes, employment and prices. In their opinion, it is necessary to abandon the maintenance of prices for agricultural products, abolish export-import quotas and tariffs, government control over the level of rent, abolish legally established minimum wage limits and maximum price limits, abandon detailed regulation of any areas of economic activity, any control over radio and television, abolish compulsory insurance to ensure old-age pensions, licensing of all types of labor activity, stop public housing construction, and abandon universal conscription in peacetime.

Thus, the scope of state activity in the economy should be limited to regulating the amount of money in circulation, combating monopolies, individual market imperfections, or social assistance in matters relating to children and disabled members of society.

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Over the past decades, macroeconomic theory has been an arena of competition between two major trends in economic thought - Keynesianism and monetarism. Since the 60s. XX century, many provisions of the Keynesian concept with the priority of fiscal policy in regulating aggregate demand were criticized.

Monetarism as a current of economic thought reveals the significant role of money in determining levels of economic activity and prices. The most prominent representative of the theory of monetarism is Nobel laureate M. Friedman, who believes that inflation is an exclusively monetary phenomenon caused by an increase in the money supply in circulation.

Having the neoclassical quantitative theory of money as its theoretical basis, monetarism focuses on developing a new version of it, as well as proposals for improving macroeconomic policy.

The term "monetarism" was introduced into scientific circulation in 1968 by the American economist K. Brunner in order to outline the approach according to which the money supply is the main factor determining the economic situation. With a broader interpretation monetarism can be considered not only as a set of practical recommendations for solving macroeconomic problems and choosing methods of macroeconomic regulation, but also as a kind of economic philosophy alternative to Keynesianism.

The views of monetarists and Keynesians on the problems of internal stability of the market system and the role of the state in this process are opposite in their conceptual basis, however, these differences are not always clearly expressed in the analytical tools used. In contrast to the Keynesian concept, according to which a free market system without active government regulation is not capable of stabilizing the economy with full employment and the absence of significant inflation, monetarism assumes that markets are sufficiently competitive to ensure a high degree of macroeconomic stability. Monetarists believe government regulation is a factor that constrains private initiative and often contains errors that destabilize the economy. The state, implementing fiscal and monetary policies, causes the very instability that these measures are designed to counteract.

Both Keynesians and monetarists base their analysis on equations that characterize the flow of income and expenditure in the economy. Keynesian identity:

Y=C+I+G+Xn,(5.3)

focuses on the analysis of the equality of total income and planned total expenses, which determines the macroeconomic equilibrium.

In monetarism the most important is the equation of monetary exchange:

M×V = P×Y(5.4)

Its left side represents the amount of consumer expenses (total expenses), the right side represents the total revenue of sellers from the sale of goods (total income).

Thus, Keynesian and monetarist equations reflect the same macroeconomic processes, but there are fundamental disagreements about which of the two concepts does this more adequately.

Main discrepancy between monetarists and Keynesians is to answer the question: is the velocity of money in the economy stable? According to classical theory, the speed of circulation of money is determined by technical and institutional factors - the level of development of the banking system, the established habits of individuals, etc. Therefore, it is stable in the sense that it does not depend on the amount of money in circulation. A change in their supply only leads to a change in the price level (the principle of “neutrality” of money), but does not affect either the volume of national output or the velocity of circulation of money. The influence of the money supply on the bank interest rate is unpredictable.

Monetarists They also consider the velocity of money to be stable, since its fluctuations are small and can be predicted, since the factors on which the velocity of money in the economy depends change gradually. As evidence of this stability, monetarists note the stability of the relationship between the nominal volume of national output and the money supply. In their opinion, the demand for money does not depend on its supply, but is determined by the level of nominal output. The market, in the process of establishing monetary equilibrium, leads to equality of the demand for money and its supply, which ensures the stability of the ratio of the money supply and the nominal volume of output:

V= (5.5)

Stability of the velocity of money circulation means that the supply of money is the most important factor determining the nominal volume of national output, the level of prices and employment. Hence, from a monetarist position, the state’s monetary policy is the most important instrument of macroeconomic regulation. The importance of fiscal policy as a means of stabilizing the economy and redistributing resources is assessed by monetarists as low. For Keynesians, on the contrary, the main determinant of real output, employment and price levels is total expenditure, the components of which are determined by many variables and are not directly dependent on the money supply.

Monetary policy, according to monetarists, in the short term can influence the real level of national production and employment, but in the long term it affects only the price level, therefore the central bank should stabilize not the interest rate (this is a wrong goal), but the growth rate of money supply. Economic instability is generated more by incorrect monetary policy than by internal instability of the market system.

If for Keynesians the impact of changes in the money supply on the dynamics of output and employment is carried out only through a change in the interest rate (which in turn affects the level of investment of private firms), then for monetarists a change in the money supply directly affects the monetary value of national output, transforming into a rise in prices, and partly (in the short term) - into the growth of real total income. But such a relationship certainly presupposes stability in the velocity of money circulation.

Government intervention in the economy, according to monetarists, in many cases it is inevitable, but it should create conditions for the free and stable functioning of market mechanisms based on the implementation of rational long-term macroeconomic policies.

In the monetarist concept, monetary policy is a “formidable weapon” because it determines the level of economic activity to a much greater extent than Keynesians believe. Therefore, monetarists advocate the legislative establishment monetary rule according to which the annual growth rate of money supply must correspond to the average annual growth rate of real national production. In other words, if the average annual increase in the gross national product in real terms is 3-5%, then the money supply in the economy (money supply) should increase within the specified limits. A smaller increase will lead to a shortage of money, and possibly to deflation and unemployment; more will cause inflation. The legislative establishment of a monetary rule will eliminate the causes of instability in the economy; trends towards recession or inflation will be temporary (short-term) in nature.

Monetarists believe that the main reason for the shift in the aggregate demand curve is a change in the amount of money in circulation. Since the aggregate supply curve in the long run is almost vertical (which corresponds to an economy close to full employment), a change in aggregate demand will primarily affect the price level R and will have little effect on the real volume of national production Y .

Monetary rule connects an increase in the money supply with an increase in real output. An increase in aggregate demand must correspond to an increase in aggregate supply, so that the average price level does not change.

Monetarists reject fiscal policy as a means of macroeconomic stabilization. They attribute its ineffectiveness to displacement effect (replacement) private investment by government. When the government, during a period of economic recession, runs a budget deficit, and the amount of money in circulation does not change, government loans lead to an increase in the demand for money and, accordingly, an increase in the interest rate, which negatively affects the volume of private investment - it decreases. (Keynesians do not deny the existence of the crowding out effect, but consider it insignificant.) When the budget deficit is covered by issuing new money, the crowding out effect is not observed, but in this case, the growth of economic activity is the result not of fiscal, but of monetary policy. But active monetary policy is also not welcomed by monetarists, as shown above, which is explained by two main reasons. Firstly, they indicate the existence of a time lag, which is associated with the uncertainty of the period of influence of monetary regulation measures on the economy (from six to eight months to two years). Accordingly, when these measures begin to take effect, it is possible that the situation in the economy will be different and earlier efforts will only aggravate macroeconomic instability. AND, Secondly, The interest rate, which monetary policy aims to regulate, is considered by monetarists to be a mistaken goal.

Monetarism, as one of the most important trends in modern economic thought, is the enemy and main opponent of both Keynesianism and institutionalism. The name of the direction comes from the Latin “coin” - monetary unit, money. Monetarism originated in the USA and began to spread in the 50-60s of the 20th century. The term "M." was introduced by K. Brunner in 1968. The founder is Milton Friedman (born 1912) prof. University of Chicago, in 1976 he won the Nobel Prize in Economics for his analysis of consumption and the history of money. circulation and development of monetary theory. former economic adviser to the American President. He outlined his economic views in several works, the most famous of which is Capitalism and Freedom (1962).

M. went through three stages of development. The 1st stage (195060) was devoted to the creation of a new version of the quantity theory of money, inflation, and the study of the causes of economics. cycle and controversy with Keynesian policies based on budgetary methods. The 2nd stage (197-80s) was marked by the dominance of M. ideas in economics. theory and economics politics. At this stage, the concept of state was developed. politics and defended the ideas of economics. freedom and personal freedom. The 3rd stage (from the 90s) is characterized by further theoretical study. M. instruments and the departure from “pure” monetary policy that began in practice in connection with the shift in Ch. emphasis in the economy from issues of inflation to problems of employment, growth rates, income. M. made a great contribution to the development of modern science. theories of money, inflation, government. money control policies appeals. M. has become an important part of modern history. neoclassical economic movement. thoughts.

M.'s theory of money was originally presented in a work edited by. M. Friedman “The Quantitative Theory of Money. New formulation" (1956).

The most important feature of monetarism as an economic school is that its supporters pay main attention to the monetary factor, the amount of money in circulation. The slogan of the monetarists is: “Money matters.” In their opinion, the money supply has a decisive influence on economic development; the growth of national income depends on the growth rate of the money supply.

Monetarism continues the traditions of the classical and neoclassical schools of economics. In their theory, they rely on such classics as economic liberalism, minimal government intervention in the economy, the need for free competition, and price flexibility when demand and supply change. The influence of monetarism in the world intensified in the 70s and 80s, when inflation and budget deficits became the main problems of the economy. Monetarists associate the emergence of these problems with the theory and practice of Keynesianism and with government regulation of the economy.

Main representatives: Milton Friedman, Karl Brunner, Alan Meltzer, Anna Schwartz.

Key points:

1. Sustainability of the private market economy. Monetarists believe that a market economy, due to internal tendencies, strives for stability and self-adjustment. If disproportions and violations occur, this occurs primarily as a result of external interference. This provision is directed against the ideas of Keynes, whose call for government intervention leads, according to monetarists, to a disruption of the normal course of economic development.

2. The number of state regulators is reduced to a minimum, the role of tax and budget regulation (administrative methods) is eliminated or reduced.

3. “Money impulses”, money emission, serve as the main regulator influencing economic life. Friedman argued, citing the "monetary" history of the United States, that between the dynamics of the money supply and the dynamics of national income there is the closest correlation and monetary impulses are the most reliable adjustment of the economy. The money supply affects the amount of spending by consumers and firms; an increase in the supply of money leads to an increase in production, and after full capacity utilization - to an increase in prices.

4. Since changes in the money supply do not immediately affect the economy, but with some delay (lag) and this can lead to unjustified violations, short-term monetary policy should be abandoned. It should be replaced by policies designed to have a long-term, permanent impact on the economy, with the goal of increasing productive capacity. This provision, like others, is also directed against the Keynesian course towards the current settlement of the situation: Keynesian adjustments are delayed and can lead to opposite results.

The essence of monetary theory
Friedman and his associates put forward the monetary theory of determining the level of national income and the monetary theory of the business cycle. According to this theory, the discrepancy between money demand and its supply is of utmost importance. The money demand function of monetarists is stable. This means that the economy needs a steady increase in the money supply to function properly. But the money supply is extremely unstable, and this instability is precisely generated by the policies of the state and the central bank, which, with the help of monetary regulation, are trying to fight economic crises. It is in the discrepancy between money demand and supply, in the instability of money supply, that monetarists see the cause of instability and cyclical fluctuations in the economy.

Causes of inflation
Monetarism also developed its own theory of inflation. An increase in the money supply, according to this theory, causes partly an increase in real income, and partly a rise in prices. Two factors determine the distribution of the effect of the increased money supply between the increase in prices and the increase in real income. This is, firstly, the relationship between the current level of production and the level corresponding to full employment. The closer the economy is to a state of full employment, the more the increase in the money supply will stimulate price growth, rather than an increase in national income; secondly, this is the expected behavior of prices. In conditions of developing inflation, the very expectations of a further rise in prices will turn the growth of the money supply into a further rise in prices rather than contribute to the growth of real income.
It is inflation - and not crises - that monetarists consider the main evil of the market system.

Theory of unemployment
Monetarists also opposed the Keynesian theory of unemployment. They put forward the theories of the “natural rate of unemployment”, the “new microeconomic theory of unemployment”. These theories associate the unemployment rate with the inflexibility of labor markets, with a lack of labor mobility, with imperfect information, that is, with the peculiarities of the supply of labor itself. In all these theories, unemployment appears as “voluntary” and remains permanently at some “natural” level. Moreover, the excessive expansion of social benefits from the state weakens incentives for employment and contributes to an increase in “voluntary” unemployment. In these conditions, a full employment policy, according to monetarists, can only stimulate inflation and increase imbalances in the labor market.

Problems of government regulation
Monetarists believe that budget deficits in no way stimulate economic growth. It either directly fuels inflation or, if financed by borrowing from private capital markets, it increases competition in those markets, raises interest rates and crowds out private capital, thereby reducing investment. Economic policy, according to monetarists, should be reoriented from irresponsible Keynesian recipes for countercyclical regulation, leading to sharp fluctuations in the money supply, and, above all, from deficit financing to strict regulation of money in circulation, regardless of the nature of the situation. Economic policy must abandon the unattainable principle of "fine-tuning" economic conditions and be guided by the strict "rule" that the money supply must increase in accordance with the long-term growth rate of national income.

Friedman's Money Rule

Friedman assumed that monetary policy should be aimed at achieving a match between the demand for money and its supply. The growth of money supply (the percentage of money growth) should ensure price stability. Friedman believed that it was very difficult to maneuver with various indicators of money growth. Central bank forecasts are often wrong. “If we look at the monetary and financial area, in most cases the wrong decision will most likely be made, since decision makers consider only a limited area and do not take into account the totality of the consequences of the entire policy as a whole,” the central bank should abandon the opportunistic policy of short-term regulation and move to a policy of long-term impact on the economy, a gradual increase in the money supply.

When choosing the growth rate of money, Friedman proposes to be guided by the rule of “mechanical” growth of the money supply, which would reflect two factors: the level of expected inflation and the growth rate of the social product. In relation to the United States and some other Western countries, Friedman proposes setting the average annual growth rate of the money supply at 4-5%. However, he assumes a 3% increase in real GNP (for the United States of America) and a slight decrease in the velocity of money. This 4-5% increase in money should be continuous - month after month, week after week. In one of his works, the author of the “monetary rule” indicates: “... a stable level of prices for final products is the desired goal of any economic policy” and “a constant expected. the rate of growth of the money supply is the most significant point than knowing the exact value of this rate.” 1