Why Monetarism Failed

Paul Krugman:

Why Monetarism Failed: Brad DeLong asks why monetarism — broadly defined as the view that monetary policy can and should be used to stabilize economies — has more or less disappeared from the scene, both intellectually and politically. As it happens, I wrote about essentially the same question back in 2010, inspired by the more or less hysterical pushback against quantitative easing. I thought then and think now that ... Milton Friedman’s project was always doomed to failure.

To repeat the key points of my argument:

On the intellectual side, the “neoclassical synthesis” — of which Friedman-style monetarism was essentially part, despite his occasional efforts to make it seem completely different — was inherently an awkward construct. Economists were urged to build everything from “micro foundations”... But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust.

Inevitably the drive for purism collided with the realistic accommodations, the ad hockery, needed to be useful; sure enough, half the macroeconomics profession basically said, “what are you going to believe, our models or your lying eyes?” and abandoned any good sense Friedman had originally brought to the subject.

On the political side, there was a similar collision. Right-wingers insisted — Friedman taught them to insist — that government intervention ... always made things worse. Monetarism added the clause, “except for monetary expansion to fight recessions.” Sooner or later gold bugs and Austrians, with their pure message, were going to write that escape clause out of the acceptable doctrine. So we have the most likely non-Trump GOP nominee calling for a gold standard, and the chairman of Ways and Means demanding that the Fed abandon its concerns about unemployment and focus only on controlling the never-materializing threat of inflation. ...

The point is that the monetarist idea no longer serves any useful purpose, intellectually or politically. ...