Picture yourself as the host of an economists' dinner party where no one is having any fun (perhaps not a hard thing to imagine). There are two competing schools of thought on what should be done to fix the party. The Keynesian economists in the room would tell you to break out the party games and snacks, and then force people into a rousing game of Twister. Meanwhile, 澳洲幸运5开奖号码历史查询:Milton Friedman and his 澳洲幸运5开奖号码历史查询:monetarist pals have a different solution. Control the booze, and let the pa♐rty take care of its🌞elf.

Of course, the economy is slightly more complicated than a dinner party gone bad. But the fundamental question is the same: Is it better to intervene when things go wrong, or attempt to prevent problems before they start? This article will explore the rise of the laid-back monetarist approach to controlling 澳洲幸运5开奖号码历史查询:inflation, touching upon its proponents, suc😼cesses, and fail𓆉ures.

The Basics of Monetarism
Monetarism is a 澳洲幸运5开奖号码历史查询:macroeconomic theory borne of criticism of Keynesian economics. It was named for its focus on money's role in the economy. This differs significantly from Keynesian economics, which emphasizes the role that the government plays in the economy through expenditures, rather than 澳洲幸运5开奖号码历史查询:the role of monetary policy. To monetarists, the best thing for the economy is to keep an eye on the 澳洲幸运5开奖号码历史查询:money supply and let the market take care of itself. In the end, the theory goes, markets are more efficient at dealing with inflation and unemployment.

Milton Friedman, a Nobel Prize-winning economist who once backed the Keynesian approach, was one of the first to break away from commonly accepted principles of Keynesian economics. In his work "A Monetary History of the United States, 1867-1960" (1963), a collaborative effort with fellow economist Anna Schwartz, Friedman argued that the poor 澳洲幸运5开奖号码历史查询:monetary policy of the 澳洲幸运5开奖号码历史查询:Federal Reserve was the primary cause of the 澳洲幸运5开奖号码历史查询:Great Depression in the United States, not problems within the savings and banking system. He argued that markets naturally move toward a stable center, and an incorrectly set money supply caused the market to behave erratically. With the 澳洲幸运5开奖号码历史查询:Bretton Woods system's collapse in the early 1970s and the subsequent increase in both unemployment and inflation, governments turned to 澳洲幸运5开奖号码历史查询:monetarism t🃏o explain their predicaments. It was then that this economic school of thought💟 gained more prominence.

Monetarism has several key tenets:

• Control of the money supply is the key to setting business expectations and fighting inflation's effects.
• Market expectations about inflation influence forward interest rates.
• Inflation always lags behind the effect of changes in production.
• 澳洲幸运5开奖号码历史查询:Fiscal policy adjustments do not have an immediate effect on the economy. Market forces are more efficient in making determinations.
• A natural unemployment rate exists; trying to lower the unemployment rate below that rate causes inflation.

Quantity Theory of Money
The approach of classical economists toward money states that the amount of money available in the economy is determined by the 澳洲幸运5开奖号码历史查询:equation of exchange:

$\begin{aligned} &M \times V = P \times T \\ &\textbf{where:}\\ &M = \text{Amount of money currently in circulation} \\ &\text{over a time period} \\ &V = \text{Velocity - how often money is spent or turned} \\ &\text{over during the time period} \\ &P = \text{Average price level} \\ &T = \text{Value of expenditures or number of transactions} \\ \end{aligned}$​M×V=P×Twhere:M=Amount&nbs♌p;of money currently in c𓄧irculationover a time periodV=Velocity - how often money is spent or&nb꧑sp;t🦄urnedover during the time periodP=Average price levelT=Value of&nbs🔯p;expenditures or number of transꦗactions​

澳洲幸运5开奖号码历史查询:Economists tested the formula and found that the 澳洲幸运5开奖号码历史查询:velocity of money, V, often stayed relatively constant over time. Because of this, an increase in M resulted in an increase in P. Thus, as the money supply grows, so too will inflation. Inflation hurts the economy by making goods more expensive, which limits consumer and business spending. According to Friedman, "inflation is always and everywhere a monetary phenomenon." While economists following the Keynesian approach did not completely discount the role that money supply has on 澳洲幸运5开奖号码历史查询:gross domestic product (GDP), they did feel that the market would take more time𝓡 to react to adjustments. Monetarists felt that markets w🌊ould readily adapt to more capital being available.

Money Supply, Inflation and the K-Percent Rule
To Friedman and other monetarists, the role of a 澳洲幸运5开奖号码历史查询:central bank should be to limit or expand the money supply in the economy. "Money supply" refers to the amount of hard cash available in the market, but in Friedman's definition, "money" was expanded to also include 澳洲幸运5开奖号码历史查询:savings accounts and other on-demand accounts.

If the money supply expands quickly, then the rate of inflation increases. This makes goods more expensive for businesses and consumers and puts downward pressure on the economy, resulting in a 澳洲幸运5开奖号码历史查询:recession or depression. When the economy reaches these low points, the central bank can exacerbate the situation by not providing enough money. If businesses - such as banks and other 澳洲幸运5开奖号码历史查询:financial institutions—are unwilling to provide credit to others, it can result in a 澳洲幸运5开奖号码历史查询:credit crunch. This means there is simply not enough money to go around for new investments and new jobs. According to monetarism, by 🧔plugging more money into the economy, the central bank could incentivize new investment and boost confidence within the ꦚinvestor community.

Friedman originally proposed that the central bank set targets for the inflation rate. To ensure that the central bank met this goal, the bank would increase the money supply by a certain percentage each year, regardless of the economy's point in the 澳洲幸运5开奖号码历史查询:business cycle. This is referred to as the 澳洲幸运5开奖号码历史查询:k-percent rule. This had two primary effects: It removed the central bank's ability to alter the rate at which money was added to the overall supply, and it allowed businesses to anticipate what the central ba꧂nk would do. This effectively limited changes to the velocity of money. The annual increase in money supply was to correspond to the natural growth rate of GDP.

Expectations
Governments had their own set of expectations. Economists had frequently used the 澳洲幸运5开奖号码历史查询:Phillips curve to explain the relationship between unemployment and inflation, and expected that inflation increased (in the form of higher wages) as the unemployment rate fell. 澳洲幸运5开奖号码历史查询:The curve indicated that the government could control the unemployment rate, which resulted in the use of Keynesian economics in increasing the ꦺinflation rate to lower unemployment. During the early 1970s, this concept ran into trouble as both high unemployment and high inflation were⛄ present.

Friedman and other monetarists examined the role that expectations played in inflation rates; specifically, that individuals would expect higher wages if inflation increased. If the government tried to lower the unemployment rate by increasing demand (through government expenditures),𓆉 it would lead to higher inflation and eventually to firms firing workers hired to meet that ꩲdemand bump. This would occur any time the government tried to reduce unemployment below a certain point, commonly known as the natural unemployment rate.

This realization had an important effect: monetarists knew that in the 澳洲幸运5开奖号码历史查询:short run, changes to the money supply could change demand. But in the long run, this change would diminish as people expected inflation to increase. If the market expects future inflation to be higher, it will keep 澳洲幸运5开奖号码历史查询:open market interest rates high.

Monetarism in Practice
Monetarism rose to prominence in the 1970s, especially in the United States. During this time, both inflation and unemployment were increasing, and the economy was not growing. Paul Volcker was appointed as chair of the 澳洲幸运5开奖号码历史查询:Federal Reserve Board in 1979, and he faced the daunting task of curbing the rampant inflation brought on by high 澳洲幸运5开奖号码历史查询:oil prices and the Bretton Woods system's collapse. He limited the money supply's growth (lowering the "M" in the equation of exchange) after abandoning the previous policy of using 澳洲幸运5开奖号码历史查询:interest rate targets. While the change did help the inflation rate drop from double digits, it had the added effect of sending the economy into 🍷a recession as interest rates increased.

Since monetarism's rise in the late 20th century, one key aspect of the classical approach to monetarism has not evolved: The strict regulation of banking 澳洲幸运5开奖号码历史查询:reserve requirements. Friedman and other monetarists envisioned strict controls on the reserves held by banks, but this has mostly gone by the wayside as 澳洲幸运5开奖号码历史查询:deregulation of the 澳洲幸运5开奖号码历史查询:financial markets took hold and company 澳洲幸运5开奖号码历史查询:balance sheets became ever more complex. As the relationship between inflation and the money supply became looser, central banks stopped focusing on strict monetary targets and more on inflation targets. This practice was overseen by 澳洲幸运5开奖号码历史查询:Alan Greenspan, who was a monet🃏arist in his views during most of his near-20-year run as Fed cha𝓡ir from 1987 to 2006.

Criticisms of Monetarism
澳洲💜幸运5开奖号码ജ历史查询:Economists following the Keynesian approach were some of the most critical opponents to monetarism, especially after the anti-inflationary policies of the early 1980s led to a recession. Opponents pointed out that the Federal Reserve failed to meet the demand f🐻or money, which resulted in a decrease in available capital.

Economic policies, and the theories behind why they should or shouldn't work, are constantly in flux. One school of thought may explain a certain time period very well, then fail on future comparisons. Monetarism has a strong track record, but it is still a relatively new school of thought, and one that will likely be refined further over time.