miércoles, 28 de enero de 2009

el monetarismo

My fellow distributists do not talk a lot about monetary policy and do not understand why I simultaneously subscribe to both the monetarist and the distributist schools of economic thought. Here's the short of it: they both contain uncommon common sense. While I do not agree with Milton Friedman's radical political views, I believe his approach to monetary policy is the best one yet.

Monetarism is the simply idea that money should be money. Keynesians and supply siders focus on their pets projects which have the goal and making money somehow a magical cure all to the business cylce. I suspect that they countercyclical policy actually retards overall economic growth, but I have no proof of that. Now, money has 4 purposes:

1. a medium of exchange

2. a unit of value

3. a standard of deferred payment
4. a store of value

Now monetarists aim for a constant money growth target of about 3% greater than growth of GDP. This ensures that there will be no deflation, but very low inflation. Now, supply siders and Keynesians are always inflating or deflating the dollar insanely fast, erroding away its 3 of its 4 basic functions. While the function of medium of exchange is not usually affected, in cases of very bad activist decisions (à la Zimbabew), it can. As a unit of value, the contantly changing currency loses its efficieny and messese with everyone's interanal price regulators. Supply sider Bush inflated the dollar 20% during his administration, and I expect a similar amount from Keynesian Obama. As a standard of deferred payment, money fares even worse under our Keynesian/supply sider tyranny. Frankly, you never quite know how much the money you are going to receive will be worth, which distracts from productive efforts and engages a large part of the economy in speculating about policy/inflationary expectations, etc. And finally, as a store of value, considering that currencies are almost always inflating, just at varying rates, frequently currencies are not very good stores of value. While I have no problem with the monetarist constant low rate of inflation (which I imagine would encourage people to invest in capital and not just throw everything in a savings account or the like), the inflation we have with the Keynesians/supply siders creates dificulties with economic efficiency. Because monetarism proposes to keep money as money, I believe that it is the most logical of any current school of monetary policy.

2 comentarios:

Old Fashioned Liberal dijo...

What's wrong with deflation? And
Is deflation inevitable if there is no inflation?

don pedro dijo...

it's pretty much inevitable to have one of the other. To have the money supply stay perfectly in tandom with the demand for money is pretty much impossible; however, it is technically possible to have neither inflation not deflation. However, monetarists prefer to vacilate in vary low levels of inflation rather than vacilate between infation and deflation, as deflation seems to be economically much worse, probably because it increases the cost of borrowing for investment.