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Subject Area: Political Theory

Monetarism & Economic Ideology - Leonard P. Liggio, Literature of Liberty, Autumn 1982, vol. 5, No. 3 [1982]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Monetarism & Economic Ideology

Grahame Thompson

“Monetarism and Economic Ideology.” Economy and Society 10 (February 1981): 27–71.

The author presents a socialist economic and political ‘critique of ideology’ directed against the current ‘monetarism’ espoused by the government of Great Britain. Specifically, Thompson looks at the economics of ‘monetarism’ as presented in two recent booklets: Tim Congdon's Monetarism: An Essay in Definition produced by Sir Keith Joseph's Centre for Policy Studies, and Bryan Gould's (et al.) The Politics of Monetarism, a Fabian Society Tract. In addition, Thompson comments on a recent document issued jointly by the Treasury and the Bank of England which is concerned with the issue of money supply control: Cmnd. 7858, Monetary Control published by HMSO and known as the Green Paper.

After a discussion of the conceptualization of money and the way it functions, the author highlights the mechanisms by which ‘monetarism’ analyzes the relationship between the money supply and price formation. Borrowing from Tim Congdon's “fundamental precepts” of monetarist theory, Thompson lists three items on which, he claims, monetarists would agree:

  • (a) That ‘money matters’ and in particular that it is the quantity of money (or stock of money) that determines prices. This is usually discussed in terms of the ‘quantity equation’: MV = PQ where M equals the stock of money, V is its velocity of circulation, P is the general price level, and Q the quantity of goods and services available (output in the period). Accepting that V and Q are constant for a moment, M determines P in simple terms.
  • (b) A ‘belief in markets.’ The idea here is that markets work; they clear in the ‘long-run’ so that the private sector is inherently stable. This relies upon an appeal to ‘natural forces’ that are supposed to be at work in the economy.
  • (c) That there is a stable relationship between the demand for money and money national income. While it is argued that there is such a stable relationship on the ‘demand side,’ the supply of money fluctuates widely (because of the government's need to finance itself under differing economic constraints) and this ‘disturbs’ the natural rhythms of the private sector. Thus, it is precisely government activity in this sense that sets up the distrubances in the economy, which themselves call forth the need for attempts at demand managed stabilization policies. Therefore ‘stop-go’ and the government intervention that it implies is a product of government itself.

Thompson criticizes, from a socialist economic position, the inadequacy of the monetarist definition of the relationship between the money supply and price formation. The monetarist analyses of this relationship are inadequate largely because they are couched at an aggregative macro-level. A reformulation is suggested based upon the necessity to define the economic agents in the economy whose practices and processes provide the basis for the price formation and money-supply generation.

The concept of a ‘money-supply’ is raised and the difficulties of defining and controlling this in a developed financial system are discussed. “The attempt to control the money supply by Monetarist methods has so far been a failure. The financial system has gone on creating credit largely independently of Treasury and Bank of England policy. This focuses the main political point within this struggle—something which Congdon, Gould et al. and the Green Paper fail to appreciate—that the struggle is over which agents should have the monopoly of control over the creation of credit and money within the economy.”