Monetarism is today a largely antiquated economic theory that, while it has older antecedents too, really laid its root in the 1960's with the theoretical work and research to which Keith alludes that was undertaken mainly by Professor Milton Friedman at the University of Chicago. Monetarism started coming into its own during the following decade when the reigning Keynesian theorists of the day fumbled badly in their efforts to prescribe credible remedies for or even explain the corrosive "stagflation" that characterized that period. The monetarists blamed it all on misguided government policy and, because they seemed like bright new thinkers, their ideas found a growing audience. Monetarists were prominent among the economic advisors to both the Reagan and Thatcher governments, and doing what economists always do, they started claiming credit for the economic turnaround that gathered steam under the auspices of their patrons during the 1980's. Soon they had largely displaced the Keynesians as the reigning economic ideologues of the era, despite the tenuous connection between their theories and the boom that followed the inflationary depression of the Carter and very early Reagan years.
The Monetarists were not the only right-leaning economists in on the act, of course. The so-called "supply-side" theorists focused their attention on the need to nurture businesses and investors, whose energetic contribution was deemed essential to economic growth. The "efficient market" theorists also rose in stature, arguing that every economic factor and resource has a "true" price that must be determined by a free market. They believed that only when these true prices prevail can an economy rid itself of bottlenecks and mobilize its recourses in a manner that achieves efficiency and prosperity.
However, the problem any economic theorist creates for himself when he ties his star to an economic boom is that the star is still tied there when the boom crashes. Milton Friedman died in 2006 and thus did not live to see the 2008-09 financial crisis. However, he must have had premonitions, because shortly before his death he engaged in troubled speculation about how one of the lynchpins to his theory - the supposedly constant nature of the velocity of money - the 'V' in his famous 'VM=PT' formulation - appeared to have broken down. The U.S. central bank was creating new base money at a much faster clip than the economy was growing, yet inflation was not picking up the way it should have, implying that much of the new money was somehow getting stuck. And if this central tenet of monetarist thinking was failing to hold, then Professor Friedman's entire body of work seemed suddenly open to question too.And indeed when the financial crisis hit, Monetarism fell promptly out of vogue again. With it went the ideas of the "supply-side" and "efficient market" theorists, which now appeared not wrong so much as irrelevant to the current emergency. When Obama and the Democrats swept into power in 2008, they had few new economic ideas of their own and resorted to what was in effect a revanchist campaign to re-instate traditional Keynesian dogma as their guide to economic policy. Already tired when sidelined two decades earlier, this hoary set of ideas had gained nothing but moss during the intervening years.
And thus today, our economic gods, right and left, are all dead at time when our economy is limping along and capitalist democracy is again in crisis. The grinding warfare currently underway among our political factions is, in my judgment, more a reflection of this fundamental economic malaise than it is a cause of anything.I'm not an economist, but I've been interested in economics for most of my adult life and I enjoy discussing economic theory. It's my opinion that as long as economists confine themselves to the academic arena, they can, like all good scholars, provide us with useful insights into the world around us. However, watch out when an economist suddenly emerges from obscurity and acquires celebrity status! This is an unmistakable sign that special interests have taken note of his ideas and are promoting his career to provide themselves with intellectual cover for self-interested behavior. The economist is thereafter ruined.
Keith himself dismisses monetarism, brainchild of the famous Dr. Friedman, as a tool of the "comfortable" classes, who have money and thus fear inflation more than anything else. While I believe this particular argument can be more aptly applied to gold-standard advocates than to the monetarists, I take Keith's point and applaud his effort to look behind the facade of economic theory, at least in this limited case.I also think it's fair to criticize the supply-side economists in a similar vein. In my judgment, they in the beginning had valuable insights into how incentivizing producers can power economic growth. However, when during the Reagan years Professor Art Laffer soared from his humble perch at Peperdine University to become a household name with his "Laffer Curve" idea, everyone should have suspected that something was fishy. The famous graph was supposedly first sketched out on a cocktail napkin, and Laffer's followers later abandoned even much pretense of academic rigor as they became dogmatic cheerleaders for any tax cut proposal making the rounds in Washington. They helped enrich our growing class of hedge-fund billionaires, while working hand-in-glove with big-spending Democrats to create a permanent budget deficit, which is currently ready to blow out again as soon as our sputtering economy stalls.
And as for the "efficient market" theorists, their work was embraced by the early architects of the structured finance market. Those practitioners who bothered to think about a higher purpose for their labor liked to describe themselves as serving market efficiency by buying up underpriced financial assets, then packaging and re-selling them at "true value". The impact that these folks ultimately had on our economy needs no retelling at this point. The poster boys for efficient-market ideology were, of course, Robert Merton and Myron Scholes, who rocketed to world-wide fame in 1997 by winning a Nobel Prize for their speculations. The prize money must have burned holes in their pockets, however, because in the following year they teamed up with John Meriwether, recently fired from Solomon Brothers, and put their money and ideas to work guiding a live hedge fund. Long-Term Capital Management promptly blew sky-high and gave the financial markets a small dress-rehearsal for the catastrophe that was to strike a decade later. Theoretical economics had met the real world.However, these exploitations of economic theory are small potatoes compared to the granddaddy of them all, which is the corruption of the theories of John Maynard Keynes that has occurred over the decades. Not to keep picking on Paul Krugman, but he is yet another celebrity economist and, for that matter, another Nobel Laureate, who has risen to fame by providing intellectual cover for real-world players. Keynesian economics has been with us now for most of a century, although few people today have the patience to wade through the Master's original work. What people do see are Dr. Krugman's well-written and easy-to-digest diatribes every week in the New York Times. Why does an economist even have a column in the New York Times? The answer is that he serves vested interests who have supported his career and want to ensure he gets the audience he needs. These interests are the burgeoning constituency of highly-paid bureaucrats, crony capitalists, consultants, and wealthy lawyers whose careers, fortunes, livelihoods and prestige are tied to government.
Most importantly, modern neo-Keynesianism serves the interest of politicians who garner political power to themselves by dispensing government money. Even power-loving big-government Republicans have come to understand the compelling beauty, as when Richard Nixon, of all people, once happily declared, "We're all Keynesians now." The ideology promotes the need for endless growth in spending to compensate for the chronic insufficiency they espy in the elusive phantom they like to call "aggregate demand". Dr. Krugman never wants to bore his audience, and he usually softens the hard economics by emphasizing instead the social good the money does. He also constantly downplays the risk of any problems resulting from the massive increases in taxes and debt that will be necessary in the future to pay for all the expansion his patrons have in mind. It's reassuring to his readers to hear all this from a Nobel Laureate, who surely must know what he's talking about, and it's easy for them to imagine Dr. Krugman's critics as being both hard-hearted and stupid.Some of my best friends are economists, and I certainly to not mean to suggest in all this that there is something inherently dishonest about their chosen profession. I do think, however, that they need to be aware of their limitations. And they should cast a gimlet eye on fame if it ever comes their way, because it can be a poison apple.