FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Monetarism vs Keynesianism

Updated on January 30, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Monetarism and Keynesianism

The primary difference between Monetarism and Keynesianism stems from the widely different views on the authority and means for maintaining economic stability in a nation. Monetarism revolves around the inflow of money into the economy, while Keynesianism advocates control over the demand for goods and services.

MonetaristsMonetaristsMonetarists refer to the believers of the monetarism school of thought, which propagates controlling the money supply to achieve economic stability. Economist Milton Friedman was the major advocate of monetarism theory.read more believed that controlling the money supply in the economy can help manage inflation and hence the demand for goods and services. In contrast, Keynesians supported government investment in infrastructure and other services to generate employment and thus more demand. Likewise, they argued that this demand was the chief driver of all economic activity.

Monetarism-vs-Keynesianism

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Monetarism vs Keynesianism (wallstreetmojo.com)

What is Monetarism?

MonetarismMonetarismMonetarism is a macroeconomic thought that emphasizes the role of money supply in the growth and stability of an economy.read more is a school of economic thought that became influential in the 1970s. Milton Friedman, the Nobel prize-winning economist, was the biggest proponent of the principles of monetarism during that period.

A key tenant of Monetarist economic thought is that the money supply is the chief driver of a nation’s economic activity. Hence, governments and central banks could stabilize the economy by prioritizing monetary policy over fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more.

In their view, a steady increase in money supply with a predictable velocity could increase the demand for goods and services in the market. Moreover, if there were an increase in demand for goods or services, it would result in higher employment and better wages. However, a predictable velocity may not be constantly achievable in many economic conditions.

While the Keynesian model argued a tradeoff between unemployment and inflation, Monetarists easily disregard this notion. By their logic, a monetarist policy is likely to obsess more about managing inflation than unemployment during a recession. Monetarists also conventionally advocated for restraining government interference in the economy and actively pushed governments to take a back seat while allowing central banks to lead efforts in managing the economy. As a result, monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more is widely accepted as the primary macroeconomic instrument for many economies in the world today. 

What is Keynesianism?

British economist John Maynard Keynes developed the Keynesian economic theory in response to the great depressionGreat DepressionThe Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939.read more that ravaged the domestic economy prior to World War ll. Keynes advocated greater government expenditure and lower taxes in the face of economic distress to stimulate the demand-side of the domestic economy.

In other words, Keynesians are open advocates of government holding the responsibility to stabilize the economy through fiscal measures, unlike the monetarists who advocated for the reduced role of government. They argue that an economy in trouble would continue on its downward trajectory unless the government actively took an interest in promoting consumer demand. Moreover, when in recession, people tend to panic and reduce their spendings to save money. Keynesians believe that this can create a paradoxical deterioration of economic output. This is why the government needs to improve aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more through timely intervention. In other words, increased demand would make it necessary for suppliers to produce more which possibly lead to more job opportunities and generates profits for reinvestmentReinvestmentReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more.

Unlike monetarists, Keynesians leaned more towards reducing unemployment rather than managing inflation. Even though Keynesians acknowledge the importance of money in stabilizing an economy, they reject the idea that there is no need for any fiscal measures whatsoever.

Further, Keynesians speculate that free marketsFree MarketsA free market refers to an economic system free from government interventions and controlled by privately owned businesses.read more may get blurry and often get caught up in a fog of confusion during a hard-hitting economic recessionEconomic RecessionEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more. Therefore, It serves a better purpose if the governments step up to their role in such times. This is because committing to a passive role and staying away from hand-holding the economy could lead to greater catastrophes. Thus, an active government spending can heal an economy in recession.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Monetarism vs Keynesianism Infographics

Monetarism-vs-Keynesianism-info

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Monetarism vs Keynesianism (wallstreetmojo.com)

Comparative Table – Monetarism vs Keynesianism

MonetarismKeynesianism
Evolution  and early days Gained significance in the 1970s Evolved in the 1930s after the great depression
Major Proponent Milton Freidman John Maynard Keynes
Cause of economic depression Inadequate money supply A dearth of government spending
Fiscal policy The money supply is the producer of any meaningful economic growth Expansionary fiscal policies can stimulate demand in a recession-hit economy
Government Borrowing Governments should seek to run a balanced budget. Since private investment dips in recession, governments should step up and borrow more to offset private spending.
Wages Regulators and trade unions impede forces of free markets from keeping wages flexible Wages are inherently sticky and hence could lead to unemployment during a downtrend
The focus of economic policy Inflation and interest rates are the focus of their work Unemployment, wages, and demand constitute their core tenets
Crowding out Crowding out due to government borrowing Rejects the idea of crowding out
Unemployment Natural unemployment rate due to supply Unemployment due to deficiency of demand

This has been a guide to Monetarism vs Keynesianism. Here we discuss the top 9 differences between monetarism and Keynesianism along with infographics. You may also have a look at the following useful articles –