Wednesday, 28 January 2015
Keynes versus market monetarism.
Keynes said that in a recession, government should borrow or print money and use that money to expand public and/or private spending. (See 2nd half of 5th para here.)
Market monetarism (MM) says that in a recession, government should print money and buy private sector assets. So which is right?
Both K and MM expand the private sector’s stock of cash and/or bonds, which will induce the private sector to spend more. So to that extent there’s no difference between the two.
However, MM raises the price of assets relative to the price of “current consumption” items, which is a problem. That is, on the not unreasonable assumption that the latter ratio was optimum just prior to a recession, then on implementing MM, the ratio will no longer be optimum.
And there is a second “ratio problem” with MM, as follows.
Assuming there’s an optimum allocation of assets as between public and private sectors (again, a not unreasonable assumption) at the start of a recession, MM will disturb that optimum allocation. To illustrate, the effect of MM will be to force a proportion of the population who would like to own their own homes to rent from the state instead.
Conclusion: Keynes beats market monetarism.
As pointed out above, K seemed to be indifferent as between the borrow / bonds option and the print / cash option. Personally I can’t for the life of me see the point of the state borrowing money when it can print the stuff. But that’s a separate issue to the above K versus MM argument, which is why I’ve put my “personal views” here in a postscript.
Another incidental thought. I suspect K was in private equally dismissive of the borrow / bonds option. And I suspect the REASON he kept very quiet about that in public was that he knew he was surrounded (as we are today) by econonomic illiterates who chant “inflation” every time the words “money” and “print” appear in the same sentence.