Keynesians, Neo-Keynesians, and The Monetarist Propositions

While "economists agree on much of the subject matter of macroeconomics, differences have existed and continue to exist over such matters as the relative importance of real and money supply disturbances as sources of unemployment and inflation problems, the extent to which discretionary stabilization policies should be used, and whether monetary or fiscal policies should be emphasized.

It is possible to distinguish an early Keynesian position from a modern position on these matters and, within the latter, to contrast a neo-Keynesian position with the monetarist propositions associated with Milton Friedman.

Modern economists tend to agree that monetary influences are important and, as a result, differ more from the early Keynesians than from each other.

Neo-Keynesians retain the early Keynesian views that real disturbances are important sources of economic instability and that activist discretionary stabilization policies by government are desirable. They differ from the early Keynesians in that they regard money supply disturbances as important sources of economic instability and view discretionary monetary policies as useful elements in the government stabilization policy program.

The monetarist propositions are (1) that money supply disturbances have been the source of severe unemployment and inflation problems (2) that discretionary stabilization policies of the sort recommended by Keynes and the neo-Keynesians should not be used in ordinary circumstances, and {3) that monetary policies should be emphasized when activist discretionary policies are used.

Differing views on the size of money demand and expenditure interest sensitivity are the important factors in the differences between early Keynesian and modern economists and may have some role in the neo-Keynesian-monetarist split within modern macroeconomics Differences over the extent of price and money-wage flexibility during recession also may contribute to the modern differences. However, an important element in the modern difference on the extent to which discretionary stabilization policies should be used appears to rest in a difference of opinion as to whether uncertainty and lags are such that fine tuning with discretionary policies is more likely to worsen or improve the stabilization result.