By how much should the Bank of England increase interest rates in a traditional monetarist economy

[ks.234]

It feels like what we're going through now might be the death throes of Neoliberalism and Monetarism..

I fear not, Neoliberalism and Monetarism are the only game in town. In our next election we will have a choice of monetarism or monetarism, no real choice, which is why I say monetarism has a tendency towards reducing democracy.

Also, just take a look at the anger addressed at any challenge to neoliberalism and monetarism, be it in discussion of economics here or neoliberalism’s role in the rise of Putin elsewhere.

The central point of MMT undermines Monetarism right where it starts, but it makes people angry.

Neoliberalism and Monetarism will stay strong while the lies that underpin them are believed to be true

 

[lawrence001]

I would disagree. ‘Aggregate Demand’ is a Keynesian thing and Monetarism was an explicit attack on all things Keynesian including the New Deal and our post war consensus. Monetarist economists attacked Keynesianism because the believed that any government spending on public services was literally a “slippery slope to totalitarianism”

Monetarism is opposed to public spending on ideological grounds

Unemployment is essential under the NAIRU, which despite no evidence at all is taken by monetarist to determine that a minimum level of unemployment is necessary to control inflation.

Unemployment under monetarism is deliberate, not accidental.

Under Monetarism, there is no alternative, so I’d be interested to hear what these other options to control inflation are and where they come from.

I'm using the phrase aggregate demand to represent PQ in the monetarist franework rather than just Q In the Keynesian.

I also mean monetarist in the model of the economy sense where MV= PT (or PQ) and increasing the money supply without increasing output just leads to higher prices. (Quite when economists started substituting price level for inflation I never worked out, but if they were physicists substituting displacement for velocity they'd be laughed out of university.)

So I'm not referring to some politicised concept of moneterism and anti state viewpoint, just the idea that money supply, nominal output, and inflation are linked and need to be part of the consideration when setting policy.

 

[ks.234]

I'm using the phrase aggregate demand to represent PQ in the monetarist franework rather than just Q In the Keynesian.

I also mean monetarist in the model of the economy sense where MV= PT (or PQ) and increasing the money supply without increasing output just leads to higher prices. (Quite when economists started substituting price level for inflation I never worked out, but if they were physicists substituting displacement for velocity they'd be laughed out of university.)

So I'm not referring to some politicised concept of moneterism and anti state viewpoint, just the idea that money supply, nominal output, and inflation are linked and need to be part of the consideration when setting policy.

Sorry, I don’t do number and equations. Last time I looked at an economics equation, it took me all day, gave me a headache, and still added up to ‘suppress wages’. Hopefully someone like @Super Bigote can help me with the equation

Your second paragraph is the problem, the presumption made by monetarist equations are not scientific, they start from a false premise in order to reach a predetermined conclusion.

Monetarism *is* a politicised concept

 

[lawrence001]

Well you've had your answer. You can't play with interest rates to help those who suffer.

So what's the lesser of the two evils, rates up, constant, or down? Three evils. No-one expects the monetary policy committee.

 

[lawrence001]

Sorry, I don’t do number and equations. Last time I looked at an economics equation, it took me all day, gave me a headache, and still added up to ‘suppress wages’.

Your second paragraph is the problem, the presumption made by monetarist equations are not scientific, they start from a false premise in order to reach a predetermined conclusion.

Monetarism *is* a politicised concept

I think therein lies the confusion, we're coming from very different places.

 

[ks.234]

I think therein lies the confusion, we're coming from very different places.

Can you explain where you are coming from, can you unpick that equation to you just used?

 

[lawrence001]

We have had 3 distinct era of modern capitalism.

The first was Classical Economics written by people like Adam Smith and based on the freedom of self interested actors to compete in an unfettered market. It should be noted that Smith also recognised that the market could not provide public goods, so said that things such as free schools should be provided by Government. Adam Smith did not recognise unemployment as an issue, but as the industrial Revolution developed people like the Progressives started to predict mass unemployment.

The second was the New Deal economics of Keynesianism based on full employment. This immediately came under attack by the likes of Milton Friedman who saw government spending as the cause of Hitler in Germany and Stalin in USSR.

The third era is neoliberalism which came to the US and UK after the inflation of the 70’s. Monetarism is the economic policy of neoliberalism that has all the characterises we have discussed already but also has a tendency to authoritarianism and in the U.K. where we only have a choice between two evils, is profoundly undemocratic

As above, I'm not taking about the eras of capitalism but different economic theories. Hence we're talking at cross purposes. I assume you put moneterism, new classical, Friedman, Hayek etc into the same bucket.

 

[ks.234]

As above, I'm not taking about the eras of capitalism but different economic theories. Hence we're talking at cross purposes. I assume you put moneterism, new classical, Friedman, Hayek etc into the same bucket.

No, you have made it very clear you only want to discuss monetarism. If you now want to discuss other economic theories, what are they?

 

[lawrence001]

ISTM we've already established what the alternatives are, and they're a bit limited. If that's what you want, I think this thread is done isn't it?

Not really we haven't discussed which outcome is least bad, higher inflation or higher unemployment. Assuming interest rate policy allows us to make a trade off.

Yes I know they're both bad but if we had to choose one which would it be?

 

[lawrence001]

No, you have made it very clear you only want to discuss monetarism. If you now want to discuss other economic theories, what are they?

Fair point, I was using moneterism as a catch all for accepted mainstream economics as espoused in particular by the MPC but its a multi faceted framework.

 

[lawrence001]

To be fair to the OP, I think what he's getting at is: 'given we have a government that believes 'X', what options does it think it has at the moment, so what might happen next?'

Which feels like a reasonable question. And in those terms, saying 'yes, but believing 'X' is wrong' might be correct, but isn't going to help us anticipate what happens next so as to deal with it.

Thanks for that, it's basically what I'm driving at except that I'm thinking from the perspective of the MPC rather than the government.

Anyway they've already announced it, up 0.5% to 1.75% so now the discussion can be was this about right, too high, or too low? Plus looking forward to future decisions.

 

[ks.234]

Fair point, I was using moneterism as a catch all for accepted mainstream economics as espoused in particular by the MPC but its a multi faceted framework.

Ok, but I don’t know what this multi faceted framework is. How does it change the causes and effects, and outcomes, of monetarism?

 

[lawrence001]

It feels like what we're going through now might be the death throes of Neoliberalism and Monetarism. Both ideologies are manifestly failing their professed objectives, and are being seen so to do. Whether they actually fail and die might be down to whether there is enough resilience in the political and democratic systems to enable alternatives to emerge.

This does feel like a big moment in economics, in the same way that stagflation ended mainstream Keynesianism in the late 70s, it might again spell the end of the current orthodoxy, ironically designed to prevent such a return of stagflation.

 

[Sue Pertwee-Tyr]

Maybe stagflation is the inevitable entropic process - the heat death of the financial system.

 

[Super Bigote]

Sorry, I don’t do number and equations. Last time I looked at an economics equation, it took me all day, gave me a headache, and still added up to ‘suppress wages’. Hopefully someone like @Super Bigote can help me with the equation

The equation MV=PT originates from classical economics in the 19th century. In a given period the money supply, multiplied by the number of times it is used, equals the price level multiplied by an index of the quantity of goods and services produced. In other words, the total value of money that changes hands (MV) is the same as the money value of goods and services that changes hands (PT).

So you can see that if one of the variables changes, say V increases, then money is being spent more often and that will be reflected in either or both of a rise in the price level and and a rise in goods and services produced.

Monetarists use an assumption, that V (the number of times money changes hands) and T (the quantity of goods and services) are fixed. This is because they assume that an economy is always at full employment. So an increase in the money supply will only have one effect, it will increase the price level. Hence, reduce the money supply to reduce inflation.

Of course, monetarist economies always have mass unemployment so the assumption is invalid and therefore monetarism is invalid, because once you allow for goods and services to be variable, then an increase in money supply increases output. This is typically the case where there is unemployment. The government increases the money supply / issues currency to employ unemployed people, they spend their wages in Tesco who sell more goods so need to employ more people and so on. The money supply is increased and inflation is not the result.

 

[Super Bigote]

This does feel like a big moment in economics, in the same way that stagflation ended mainstream Keynesianism in the late 70s, it might again spell the end of the current orthodoxy, ironically designed to prevent such a return of stagflation.

That is wrong, stagflation didn't end mainstream Keynesianism. Stagflation was introduced by monetarism in the 1970s at a time of supply shocks.

 

[ks.234]

The equation MV=PT originates from classical economics in the 19th century. In a given period the money supply, multiplied by the number of times it is used, equals the price level multiplied by an index of the quantity of goods and services produced. In other words, the total value of money that changes hands (MV) is the same as the money value of goods and services that changes hands (PT).

So you can see that if one of the variables changes, say V increases, then money is being spent more often and that will be reflected in either or both of a rise in the price level and and a rise in goods and services produced.

Monetarists use an assumption, that V (the number of times money changes hands) and T (the quantity of goods and services) are fixed. This is because they assume that an economy is always at full employment. So an increase in the money supply will only have one effect, it will increase the price level. Hence, reduce the money supply to reduce inflation.

Of course, monetarist economies always have mass unemployment so the assumption is invalid and therefore monetarism is invalid, because once you allow for goods and services to be variable, then an increase in money supply increases output. This is typically the case where there is unemployment. The government increases the money supply / issues currency to employ unemployed people, they spend their wages in Tesco who sell more goods so need to employ more people and so on. The money supply is increased and inflation is not the result.

I might need to read that a few times!

 

[Super Bigote]

Maybe stagflation is the inevitable entropic process - the heat death of the financial system.

No, it is a voluntary condition that the government chooses to have as an alternative to full employment and low inflation.

 

[lawrence001]

Can you explain where you are coming from, can you unpick that equation to you just used?

I have to go out I'll try and explain later

 

[ks.234]

Maybe stagflation is the inevitable entropic process - the heat death of the financial system.

Or maybe we need a new economic system built on different presumption and aimed at different outcomes. An economy where government spending is not a private enterprise but a public utility and aimed at public need rather than private profit