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The orthodox monetarist school
• During the 1950s and up to at least the mid- to late 1960s Keynesian
economics, which came to be epitomized by the Hicks–Hansen IS–LM
model, was the dominant force in the development of macroeconomics in
terms of both theorizing and policy prescriptions.
• As one leading critic of Keynesian economics has admitted, in the late
1960s the Keynesian model ‘seemed to
the only game in town in terms of macroeconomics’
• A central theme of Keynes’s General Theory is the contention that
capitalist market economies are inherently unstable and can come to rest
at less than full employment equilibrium for prolonged periods of time.
• This instability was, in Keynes’s view, predominantly the result of
fluctuations in aggregate demand.
• In the mid- to late 1940s and the 1950s the then-prevailing Keynesian
orthodoxy emphasized real disturbances (notably fluctuations in
investment and autonomous consumption) as the main cause of
fluctuations in money or nominal income, predominantly in the form of
changes in real income.
• To the early Keynesians, the Great Depression had resulted from a sharp
fall in the level of investment with the associated severe unemployment
reflecting a state of deficient aggregate demand.
The orthodox monetarist school
• According to Mayer (1980), most of the
fundamental propositions of monetarism date
back to this essay.
• Thereafter, the quantity theory of money was
accepted and developed throughout the
nineteenth and early twentieth centuries by
many notable
economists, including David Ricardo, Alfred
Marshall, Irving Fisher and, at
least up until 1930, Keynes himself.
• As Blaug notes, ‘Keynes began by loving it but
ended up by hating it’ (see Blaug et al., 1995)
The orthodox monetarist school
• This contrasted with the earlier quantity theory of money (QTM) tradition that
viewed changes in the money stock as the predominant, though not the only,
factor explaining changes in money income
• During the 1950s and 1960s, Milton Friedman, more than any other economist,
was pioneer for reviving the fortunes of the quantity theory of money.
be
• In 1968 Karl Brunner famously gave the label of ‘monetarism’ to the ideas of
those economists, particularly Friedman, who adhered to the quantity theory
of money.
• The quantity theory of money is the central plank to monetarism and
this idea is, according to Mark Blaug, ‘the oldest surviving theory in economics’
Blaug et al. (1995).
• In a reasonably coherent form, the quantity theory money stretches back over
at least 300 years to John Locke’s Some Considerations of the Consequences of
the Lowering of Interest and Raising the Value of Money published in 1692 (see
Eltis, 1995).
• However, David Hume’s classic essay, Of Money, published in 1752, is widely
recognized as perhaps the most sophisticated early statement of the quantity
theory of money.
• Historically development of orthodox monetarism beginning with
the quantity theory of money approach as it evolved from the mid-
1950s to the mid-1960s; through to the expectations-augmented
Phillips curve
analysis which was absorbed into monetarist analysis after the mid-
to late 1960s;
• Finally to the monetary approach to balance of payments theory
and exchange rate determination which was incorporated into
monetarist analysis in the early 1970s.
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The Phillips Curve and Orthodox

Keynesian Economics
• The Phillips curve is concerned with the
controversy over the relationship between
inflation and unemployment and is one of the
most famous relationships in macroeconomics

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Theoretical Underpinning

 The coexistence of positive unemployment with rising money wage rates can
be explained by the existence of frictional unemployment.
 Even when the labour market is in equilibrium, so that the demand and
supply of labour are equal and there is no tendency for the money wage rate
to rise, some frictional unemployment will exist.
 This would be the level of unemployment at which the Phillips curve cuts the
horizontal axis.
 Any reduction in unemployment below this implies excess demand for labour
and results in rising money wages even though unemployment is still positive

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