A critique of monetarism

At The Telegraph, Ambrose Evans-Pritchard calls for a further extension to our binge:

Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan.

At The Cobden Centre, Professor Kevin Dowd says that Calls for further monetary expansion are cuckoo, and James Tyler, Chief Executive of Tyler Capital, describes the article as Monetarist whitewash.

Contemporary economic thinking takes too many aggregates, amongst its other faults (see for example Money, Bank Credit and Economic Cycles, pp 519-583). Monetarists generally ignore the structure of production. A consequence is policy which is bound to cause worse problems later. As Hayek said in his Nobel lecture:

 The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.

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