Which comes first, monetarism or libertarianism?
Monetarism is the value judgement that comes out of Milton Friedman, after his study of the long history of US money supply figures, that changes in the money supply has an impact on the real economy.
I don't think Friedman was trying to take a different stance from JM Keynes.
Keynes who was saying, under conditions of a liquidity trap whereby people are holding on to cash even if interest rates were cut down to zero because it is a far better way to preserve capital value and the expansion of the money supply will not help to boost the real economy, the government may need to step in to spend in order to create employment - on the assumption that there is a direct relationship between an increase in the output level and in the employment level.
The concept of the multiplier comes in as an afterthought to this basic Keynes proposition and the multiplier was then taken up as the symbol of the new religion by Keynesians when in fact the concept of the multiplier was invented by Richard Kahn. The multiplier helps Keynes to sell his basic proposition of the need for government spending - the selling point is this: You only have to spend a little, and the economy will take care of itself. The multiplier concept is now an integral component of the Keynesian mental apparatus (not Keynes') as taught in university mathematics courses disguised as economics that the first thing that policy makers with primary education in economics think instantly of whenever they think about policy is the multiplier. This is clearly a mental rut.
Friedman was basically a Keynesian but he was no Keynes. He sought to modify the Keynes proposition by saying that indeed you cannot flood the market with the money supply in a down market in the hope of boosting the real economy because you may get instead inflation - but you can that pre-emptive monetary measures to sustain the real economic growth by controlling inflationary expectations and inflationary forces by restraining the growth of the monetary base and hence the money supply. Hence, the x% rule on monetary growth by the Monetarists.
A technical note was made by Don Patinkin in a big thick book who argued that in a recession when prices fall there will be a real balance effect that will, technically if pushed to the extreme, be able to restore the economy back to full employment on its own without Keynesian interference in the system.
Many other economists also came into the fray to generate the glory days of the bloom of a thousand economic flowery ideas but they were only of two species - only different colours. We shall not enter through this door.
Instead, let's talk about the two species.
The Classical economists, as Keynes labelled them, were in fact excellent thinkers and they had done excellent work, in my view. Classical economists were fundamentalist economists. They thought in real value terms, they thought in the long term. This was necessary at the start of a new thought process. In fact, I would call the Classical economists the Zen masters of economics. What they thought was real in the long run - that's the absolute fundamental - and the Classical economic analysis remains true today in the long run.
But the policy translations of Zen masters are the same everywhere: Do nothing. Let things be what they are suppose to be. Observe the rise and fall. Be at peace even in the midst of apparent chaos. It is chaos because you do not understand it. Once you've understood it, it is nothing.
Perfect Market Competition and the Free Market
Perfect market competition is a theoretical concept invented by Neoclassical economists principally Alfred Marshall to describe the mathematics of economics that he was trying to create. Mathematically, the intersection between two lines is a point which is not a dot. How do you describe the intersection of the supply line and the demand line. For things to be absolutely perfect, you need perfect market competition.
Of course, Joan Robinson and others came in to poo-poo Marshall's mathematical schematics. But the Marshallian scissors were perfect tools for teaching young initiates into the abstract world of economic theory. I think it is the Marshallian scissors that started the teaching of economic theory as an industry in the universities.
But perfect market competition is not the same as Free Market Enterprise.
Free market is an ideology created to counter mercantilism. Free market is an ideology along the line of the French Revolution.
Miltion Friedman, in all his later writings, was a free market enterprise ideologue. This dovetails very nicely into his x% monetary rule. So Monetarism was packaged with Libertarianism as a new industry that runs very profitably as the Chicago School of Economics. The success of the Chicago School has become the scourage of the free world. This is where we are today.
Greenspan violated the x% monetary rule by accelerating US monetary growth to cure what was essentially US loss in global competitiveness. To justify this fundamental monetarist violation, he brought in the Free Market ideology. His current defence of his misrule is that the problem was not the policy makers but the failure of the industry to regulate itself.
The violation of the x% monetary rule simply means the creation of inflationary pressures, inflation and inflationary expectations.
Instead of monetary restriction to cure the inflation, current policy thinking calls for more "monetary measures" by which is meant physically to increase the quantity of money in the system. It is no ordinary monetary increase; it is senseless monetary expansion. Flood the market.
The basic point in my policy prescription is this: We know we are going to pump in more water in a flooded situation. Instead of just simply pumping water mindlessly, we should be more vigilant and more mindful how and where we are pumping that extra water in. We should pump in water to dry areas, areas that need water, and not areas that are already flooded unless there are people in boats who need extra water to take them over the bumps they are trapped in. We have to be mindful of the collateral damage.
I do mind inflation. Sustained inflation of domestic prices - like sustained depreciation of the external value of the currency - is the quiet robber of the lives of ordinary people who know that their lives are getting harder and harder but do not realise how they are being robbed of the little asset values they spent their whole lives collecting drop by drop.
I do mind zero interest rates because zero interest rates is the most intellectually defunct idea I have ever come across - and countries that practice it are disenfranchising the future of their children. Zero interest rates destroy the role of money in the intertemporal allocation of resources.
But we have totally ignored the most fundamental required action: Building the future.