Abstract

Monetarist, Keynesian and Quantity Theories

Monetarism is neither the quantity theory rediscovered nor Keynesian theory rewritten. Thomas Mayer’s summary of monetarist propositions* captures much of the spirit as well as the substance of monetarist proposition about aggregate policy in a closed economy and brings out similarities and differences between monetarist and Keynesian theories. The formal similarity between monetarist and modern Keynesian theory is the result of development of both theories to a point at which the remaining differences are empirical. This is the position taken, in one way or another, by Thomas Mayer and most of the commentators on his paper. The paper traces many of the principal differences between monetarist, Keynesian and quantity theories to three related sources. One is the role of relative and absolute prices in the process of adjusting from one equilibrium position to the next. A second is the effect of fluctuations in real income, changes in risk and anticipations on relative prices including the prices of real and nominal assets. A third is the meaning and interpretation of fluctuations in output and employment. The last is a principal difference leading to differences in the policy recommendations by economists identified as Keynesian and monetarists. Monetarist interpretations of fluctuations in employment and output start from the model of time preference that underlies much of economic theory. The model distinguishes between anticipated income and current receipts or, in Friedman’s version between permanent and transitory income. This model suggests a very different interpretation of unemployment than the Keynesian theory, in old or new forms, where all cyclical unemployment is regarded as “involuntary”. Some implications of the “permanent income theory” are drawn, and there is discussion of evidence that could discriminate between alternative theories of unemployment.