The monetarist experiment and its legacy
While macroeconomic theory was evolving into a fashionable field of academic study with genuine influence on real-world policies after the Second World War, an important ideological rival to Keynesianism emerged in the form of the monetarism of Milton Friedman and his followers in the ‘Chicago School’. Monetarism had its roots in classical economic ideas dating from the late 18th century, which evolved in time into the neoclassical economics of the late 19th and early 20th centuries. Classical writers had treated money as a largely passive medium of exchange and store of value, with little recognition that money might play an active policy role in the economy, much less that the quantity of money might be the crucial policy instrument. But they warned that governments could debauch the currency by coining or printing too much of it, and those ideas finally crystallised in the form of the quantity theory of money towards the end of the 19th century, which asserted that the price level (and thence inflation) is determined by the size of an economy’s money stock. The basic neoclassical assumptions of highly flexible goods prices and competitive and efficient markets were essential elements in this theory, as will be explained shortly.