Monetarism vs Keynesianism

Difference Between Monetarism and 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.

What is Monetarism?

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. 

What is Keynesianism?

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.

Monetarism vs Keynesianism Infographics

Comparative Table - Monetarism vs Keynesianism

	Monetarism	Keynesianism
Evolution  and early days	Gained significance in the 1970s	Evolved in the 1930s after the great depression
Major Proponent	Milton Freidman	John Maynard Keynes
Cause of economic depression	Inadequate money supply	A dearth of government spending
Fiscal policy	The money supply is the producer of any meaningful economic growth	Expansionary fiscal policies can stimulate demand in a recession-hit economy
Government Borrowing	Governments should seek to run a balanced budget.	Since private investment dips in recession, governments should step up and borrow more to offset private spending.
Wages	Regulators and trade unions impede forces of free markets from keeping wages flexible	Wages are inherently sticky and hence could lead to unemployment during a downtrend
The focus of economic policy	Inflation and interest rates are the focus of their work	Unemployment, wages, and demand constitute their core tenets
Crowding out	Crowding out due to government borrowing	Rejects the idea of crowding out
Unemployment	Natural unemployment rate due to supply	Unemployment due to deficiency of demand

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