Monetarism vs Keynesianism

The primary difference between Monetarism and Keynesianism stems from the widely different views on the authority and means for maintaining economic stability in a nation. Monetarism revolves around the inflow of money into the economy, while Keynesianism advocates control over the demand for goods and services.

Monetarists believed that controlling the money supply in the economy can help manage inflation and hence the demand for goods and services. In contrast, Keynesians supported government investment in infrastructure and other services to generate employment and thus more demand. Likewise, they argued that this demand was the chief driver of all economic activity.

Monetarism is a school of economic thought that became influential in the 1970s. Milton Friedman, the Nobel prize-winning economist, was the biggest proponent of the principles of monetarism during that period.

A key tenant of Monetarist economic thought is that the money supply is the chief driver of a nation's economic activity. Hence, governments and central banks could stabilize the economy by prioritizing monetary policy over fiscal policy.

In their view, a steady increase in money supply with a predictable velocity could increase the demand for goods and services in the market. Moreover, if there were an increase in demand for goods or services, it would result in higher employment and better wages. However, a predictable velocity may not be constantly achievable in many economic conditions.

While the Keynesian model argued a tradeoff between unemployment and inflation, Monetarists easily disregard this notion. By their logic, a monetarist policy is likely to obsess more about managing inflation than unemployment during a recession. Monetarists also conventionally advocated for restraining government interference in the economy and actively pushed governments to take a back seat while allowing central banks to lead efforts in managing the economy. As a result, monetary policy is widely accepted as the primary macroeconomic instrument for many economies in the world today. 

British economist John Maynard Keynes developed the Keynesian economic theory in response to the great depression that ravaged the domestic economy prior to World War ll. Keynes advocated greater government expenditure and lower taxes in the face of economic distress to stimulate the demand-side of the domestic economy.

In other words, Keynesians are open advocates of government holding the responsibility to stabilize the economy through fiscal measures, unlike the monetarists who advocated for the reduced role of government. They argue that an economy in trouble would continue on its downward trajectory unless the government actively took an interest in promoting consumer demand. Moreover, when in recession, people tend to panic and reduce their spendings to save money. Keynesians believe that this can create a paradoxical deterioration of economic output. This is why the government needs to improve aggregate demand through timely intervention. In other words, increased demand would make it necessary for suppliers to produce more which possibly lead to more job opportunities and generates profits for reinvestment.

Unlike monetarists, Keynesians leaned more towards reducing unemployment rather than managing inflation. Even though Keynesians acknowledge the importance of money in stabilizing an economy, they reject the idea that there is no need for any fiscal measures whatsoever.

Further, Keynesians speculate that free markets may get blurry and often get caught up in a fog of confusion during a hard-hitting economic recession. Therefore, It serves a better purpose if the governments step up to their role in such times. This is because committing to a passive role and staying away from hand-holding the economy could lead to greater catastrophes. Thus, an active government spending can heal an economy in recession.

This has been a guide to Monetarism vs Keynesianism. Here we discuss the top 9 differences between monetarism and Keynesianism along with infographics. You may also have a look at the following useful articles –

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