Monetarism, as used in ordinary political discourse rather than in technical economics studies, refers to a general understanding of certain economic theories, usually associated with Milton Friedman or the Chicago School of economics. It rapidly became popular with politicians on the right in the USA and United Kingdom as an apparent alternative to Keynesianism in capitalist societies. The Conservative government of Margaret Thatcher elected in 1979 was perhaps the first avowedly ‘monetarist’ government in the UK, although many would argue that the economic policies of most governments since the late 1960s, including the Labour governments, have used monetarist policies. Certainly during the 1980s monetarism gained the same sort of consensus position that Keynesianism used to hold, and few politicians could honestly deny they were not, to some extent, monetarist.
The dominant concern of monetarism is the reduction of inflation at all costs, and its name derives from claims that the money supply in the economy is virtually the only factor affecting the inflation rate. However, in practice definitions of money are various, and under some of them money turns out to be extremely difficult to control.
One implication of the theory is that inflation is itself the prime evil, and the prime cause of all other economic ills, especially unemployment. At the same time the theory, certainly as understood by most right-wing politicians, argues for a virtual return to laissez-faire economics and an abandonment of government control in any direct way, in favour of operating almost entirely through the money market and the rate of interest. As taxation increases are eschewed by monetarists their preferred means of reducing the money supply will inevitably be high interest rates and/or reducing public expenditure. In many ways the theory is not so much new, as a return to what was commonly understood as economic orthodoxy before Keynesian ‘demand management’ became politically acceptable. One political consequence of the popularity of monetarism has been that the concentration on interest rate mechanisms for economic policy has increased the importance of central banks at the expense of government economic departments, with attendant calls for them to be independent of central government as in the US or German models. Thus the first important announcement of the incoming Labour government in the UK in 1997 was a return to independence for the Bank of England. Since the creation of the Third Way, as espoused by the British Labour Party, the victory of monetarist thought over British politics has become complete.
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