Deficits, Inflation, Unemployment, Interest Rates, Etc.

Abstract

These terms are part of the jargon of macroeconomics, a branch of economics that emerged from the debates over Keynes’ book, The General Theory of Employment, Interest and Money (1936). Keynes set out to explain the persistence of large-scale unemployment resulting from the economic collapse in the United States in the fall of 1929. Up to 1936 what is now called macroeconomics was called government finance and the economics of money and banking. Keynes initiated a revolution in these fusty areas but his book provided a very fuzzy blueprint to guide his followers. Debate then over appropriate government policy to combat unemployment was intense and has remained vigorous. Lasting books lend themselves to diverse interpretations and tend to live on as later generations reinterpret sections and discover new economics. Keynes’ General Theory has been somewhat in this mold. Is there a non-Keynesian or anti-Keynesian macroeconomics that lay dormant during the Keynesian heyday and has occasionally groaned and muttered from its hibernation? Or has something risen to displace Keynesism? Monetarism is the general name given to some non-Keynesian macroeconomic ideas. Monetarism is related to ‘supply side’ economics much discussed in the US during the 1980s and to Thatcherism in the UK. The basic prescription of monetarism is that a government should not try to fine tune the supply of money in order to combat unemployment or to spur the economy to more rapid growth. Let the supply of money grow steadily at about the rate of growth of output in the economy - employ a money supply rule.