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A Bit Of Economics History Needed

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I watched a documentary on the UK economy from the 60s to the 80s made by Adam Curtis in the Pandoras box series made for BBC in 1992,.

he discussed the failure of monetarism in the early 80s and Thatcher eventually renouncing it in 1985.

the tories inherited a high inflation economy from Labour and the monetarists insisted the

only way to tackle it was very high interest rates to dry up the money supply and cure the inflation.

this was carried out and led to very high unemployment.

it seems we are in similar pickle with run-away house price inflation needing to be solved,

the difference is this time it will collapse of its own accord without high interest rates,


ive heard folk say that nu-Labour practice monetarism today and this confuses me,

labour have cut interest rates to boost demand and increased public spending to boost demand so is that not neo-Keynesianism ?

do Friedman and the monetarists always advocate high interest rates ?

what is the position of the austrian school ?

Edited by kenclarkesshoes

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Thats not the alps, thats Whistler.

Your telling lies mate.

It is a sad fact but this site's becoming a bit of a magnet for the self delusional.

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labour have cut interest rates to boost demand and increased public spending to boost demand so is that not neo-Keynesianism ?

Yes, it is (a.k.a 'pump-priming'). The idea is that public money is pumped into the wider economy, where it undergoes the multiplier effect and stimulates private sector activity, thus setting up a virtuous circle of higher tax revenues, more private sector activity, etc. The trouble is it hasn't worked here in the UK and it didn't work for Japan either after their housing bubble collapsed .

do Friedman and the monetarists always advocate high interest rates ?

No. However one of the fundamental tenets of monetarism is that 'inflation is always and everywhere a monetary phenomenon', ie the root cause of inflation is always an excessive money supply, hence why they advocate high interest rates during times of high inflation.

what is the position of the austrian school ?

The Austrians (the economists, not the country) would certainly view this as classic government meddling in the market, causing gross misallocation of capital through exorbitant expansion of credit and thus the money supply, inevitably leading to a corresponding bust. Without the prior bubble, there can be no bust.


Rothbard followed his economic treatise with an investigation of the great depression, which applied Austrian business cycle theory to show that the stock market crash and economic downturn was attributable to a prior bank credit expansion. Then in a series of studies on government policy, he established the theoretical framework for examining the effects of all types of intervention in the market.


In his Theorie des Geldes und der Umlaufsmittel (1912), translated into English in 1934 as The Theory of Money and Credit, he made two lasting contributions to economics: he demonstrated how Menger's value theory applied to money, and he presented a new business-cycle theory which demonstrated that economic crises resulted from inflation-induced misallocation of resources.

Here the word 'inflation' is used to mean "an increase in the money supply", rather than the modern meaning, 'an increase in the general price level'.

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Thatcher didn't abandon Freidmans ideas in 1985 on keeping control of the money supply.

Lawson did. In many ways the power of Moneytarism to control money - and thus runaway booms (and the subsequent bust) seemed to suddenly have broken down.

Lawson didn't see how the varioius measures of the money supply worked as they did not seem to correlate well with observible facts on measured inflation. More money didn't seem to lead to more inflation in the economy to any great degree, although assets did inflate.

Friedman had always stated that Keynes was well of the mark with real data - more money lowers interest rates as assets are bought up, distorts markets and inflation follows later with higher unemployment. In keynes thoery, more money is neutral to interest rates, increases asset values - the extra money just increases output and employment without any real lasting problems (ie, - inflation)

The central problem of monetarism has been the measurements of money in the economy and the breakdown that occured in the mid 1990s - the money supply rose massively but inflation did not occur. In am recent interview Friedman stated that the biggest mistake of moneytarism has been the reliance on the quantity of money targets - M1, M0, M3 etc...

'The use of quantity of money as a target has not been a success.' He added: 'I'm not sure I would as of today push it as hard as I once did.' (FT, 7 June 2003).

Since the underlying prinicple of monetarism has been that P = VQ - the general price level is equal to the level of economic transactions times the quanity of money in the economy, more money = higher prices this would tend to mean that monetarism is fundementally flawed on observation.

I think, this does not take into account the impact of technlogical or other changes in the economy, which act to lower prices, and thus there may seem to be a disconnect from this tenant P=VQ - for a while.

However, the greatest period of technological change in Uk history - was interupted by a uncontrolled money supply in both the US and the UK in 1840. A slump followed till in 1844 the Bank Charter act set the money supply as fixed on the gold standard.

The greatest period of globalised growth in capital, science, technology and population in history lasted from 1844 to 1914 - all on a gold standard - a fixed money supply.

A false boom leads to the below.

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  • 301 Brexit, House prices and Summer 2020

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      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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