In 1932 and 1933, Keynes began developing what he called a monetary theory of production, a phrase he used as the title of a short 1933 essay. The classical economists of the 18th and 19th centuries wrote as if money didn't exist, or, more precisely, existed only 'as a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions.' In such a world, the level of prices has no effect on production, consumption, or the willingness to lend or borrow. But as Keynes pointed out, wages are 'sticky,' meaning they don't change as rapidly as commodity prices, and debt contracts are denominated in money terms, meaning that if prices fall, entrepreneurs will have trouble meeting their wage bills and servicing their debts. In classical doctrine, a fall in prices would be either neutral, since money prices don't matter for real exchange, or possibly stimulative since the fall in prices might increase demand. Conveniently, Keynes noted, in a world of neutral money, 'crises do not occur' (emphasis in original). For someone writing in 1933, at the trough of the depression, this 'assumed away the very matter under investigation.' Right-wing icon Friedrich Hayek introduced the term 'neutrality of money' into English, attributing it wrongly to Wicksell; it was actually a product of Dutch and German writers of the 1920s. The doctrine, though not the term, goes back to the mid-18th century and David Hume ('it is of no manner of consequence... whether money be in greater or less quantity'); two famous statement of the theory, incorporated into the creeds of many economists, belong to John Stuart Mill ('there cannot, in short, be intrinsically a more insignificant thing, int he economy of society, than money') and Irving Fisher ('money is a veil')... [The monetarists] do have a point; the excessive extension of credit beyond an economy's capacity to satisfy the resultant demand will give rise to inflation. But this argument ignores the reason governments used to try to stimulate economies- chronically high levels of unemployment. (It also ignores the endogeneity of money, of which more later). Friedman and Schwartz also blamed capitalism's most dire crises, the Great Depression, on the allegedly tightfisted policies of the Federal Reserve, an argument that has the pleasant ideological effect of acquitting the inner workings of the market system- such as the overproduction of commodities combined with the polarization of incomes that characterized the 1920s- of any involvement. Crises may occur, inflationary or deflationary, but they're the state's fault. Friedman used to urge that central banks be required by law or 'monetary constitution' to increase the quantity of money at a constant rate of 3-5% a year. Thirty years later, Friedman's faith seemed a bit shaken: "It is tempting to conclude from the close average relation between changes in the quantity of money and changes in money income that control over the quantity of money can be used as a precision instrument for offsetting the forces making for instability in money income. Unfortunately, the loose relation between money and income over short periods, the long and variable lag between changes in the quantity of money and other variables, and the often conflicting objectives of policy-makers preclude precise offsetting control.' Now he tells us... Monetarism officially prevailed in the U.S. from 1979, on Paul Volcker's ascension to the chair of the Federal Reserve, to 1982, when it was abandoned for ostensibly technical reasons, but actually because the U.S. economy was falling apart, the financial system was making horrible sounds, and Mexico was on the verge of default. In truth, Volcker's adoption of monetarism was a ruse for driving up interest rates to unprecedentedly high levels to create a deep recession, to break inflation, and with it, to crush the last traces of labor militancy.
Doug Henwood, Wall Street: How it Works, and For Whom
On the pretenses of supply-side economics vs. the reality of how they’ve played out
