Monetarism and the Demise of Keynesian Economics by G.R. Steele

By G.R. Steele

An exam of the function of cash in a dynamic economic system in the context of theoretical advancements either inside of and towards, the amount thought culture. Emphasis is at the risks of basing monetary coverage on macroeconomic research.

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200). Then, the increase in M occurs simultaneously with a fall in the rate of interest which, ultimately, leads to a new equilibrium, partly by induced changes in M z, and partly (via an increase in income) by induced changes in M 1. Keynes's view - that an increase in M and a fall in the market rate of interest would stimulate expenditure to raise the level of real income and liquidity preference - was radically different from established doctrine. The Quantity Theory gave no consideration to the level of real income.

The Keynesian comparative static approach allowed no appreciation of Hayek's concern with the disequilibrium nature of the cumulative process of capital investment and its consequences for business activity. Much is clarified (at little, if any, cost) by employing the modem terminology of investment appraisal with a detailed numerical illustration. For any given period (say of a year) entrepreneurs must decide upon the optimal amount of net investment; this is the amount which sets the marginal efficiency of investment (declining with the amount of net investment in each period) equal to the rate of interest.

DYNAMIC CONSIDERATIONS AND SUPPLY CONSTRAINTS Hayek emphasised the supply constraints arising during the dynamic path of adjustment be/ore a final equilibrium is reached. How is a fully employed labour force to be distributed between the different methods of production? Rising commodity prices create cumulative pressure against more capitalistic methods of production. Where investment in less roundabout methods is insufficient to arrest this trend, resource constraints may result in a failure to renew more durable machinery.

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