Tuesday, 5 August 2014

Monetarism 2

Monetarism 2: Keynesianism and Stagflation

John Butler's recent post on the Cobden Centre website [1]  cogently argues that "Stagflation is, always and everywhere, a Keynesian phenomenon", but to some extent his piece follows in the vein of Punch and Judy argy-bargy between Keynesians and Monetarists that has yanked the truth back and forth across the stage these last 4 or more decades. 
Of course politicians were happy to blame OPEC for the fourfold rise in the dollar price of oil in 1973 following the OPEC oil-embargo. John Butler calls this a "blatant reversal of cause and effect" because in the same year the USA abandoned the Bretton Woods/Smithsonian price of gold at 38$ per ounce and let the dollar float down by a factor of 2 (albeit to float down further by the end of the decade). In my view there were two causes of the oil-price rise in 1973: OPEC power and dollar weakness. One is no more "blatant" than the other.
It seems to me that John Butler is largely right that "Stagflation is, always and everywhere, a Keynesian phenomenon", but this misses the point somewhat. Keynesianism is not a method for stabilizing the value of the currency; it is a method of stabilizing the labour market. Of course the injection of money into the system will devalue the currency (unless it is subsequently withdrawn). And of course soaring unemployment of 10, 20 or 50% will bring down labour costs (unless there is a foolproof benefit system).
It all depends on what sort of country you want to live in.

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