Faulty belief in money control of markets

Monetarism is a school of thought in monetary economics that emphasizes the role of policy-makers in controlling the amount of money in circulation. It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.

The monetarist theory states that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.

Monetarism is mainly associated with the work of Milton Friedman, who was an influential opponent of Keynesian economics, criticising Keynes's theory of fighting economic downturns using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued "that inflation is always and everywhere a monetary phenomenon".

Though Friedman opposed the existence of the Federal Reserve, he advocated, given its existence, a central bank policy aimed at keeping the growth of the money supply at a rate commensurate with the growth in productivity and demand for goods. Money growth targeting was mostly abandoned by the central banks who tried it, however. Contrary to monetarist thinking, the relation between money growth and inflation proved to be far from tight. Instead, starting in the early 1990s, most major central banks turned to direct inflation targeting, relying on steering short-run interest rates as their main policy instrument.: 483–485  Afterwards, monetarism was subsumed into the new neoclassical synthesis which appeared in macroeconomics around 2000.

Source: Wikipedia

1. The naive doctrine of monetarism which promulgated the theory that inflation control was a function of money supply control has lost credibility. Although governments may attempt to control the money supply, they never actually succeed, although they may achieve a disruption in employment and production growth. Monetarism has demonstrated that by attempting to restrict money flow, capital becomes excessively expensive, fuelling inflation while at the same time causing economic stagnation because of negative impact on investment in increased production capacity. The chain of effects of monetarist policies in the USA and UK has encouraged instability in floating currencies abroad, flights of capital to the high interest countries, stagnating wages and increased costs of living.

2. If the purpose of economic activity is the maximization of money income; if all economic agents from workers to bankers are infinitely clever, capable of foreseeing all the contingencies and ramifications of what they do, and of choosing the best strategy to secure their ends; if each component of the economy necessarily experiences negative feedback -- typically higher costs and prices as output expands - that prevents activity growing explosively and pulls the system to a point of balance; with these assumptions a free market will move to the best outcome for everyone, and foster individual freedom and responsibility. If, then, men and women work only to earn money then it follows that high social security benefits will deter them form gainful employment; it follows that the more people are paid, and the less they are taxed, the harder they will work. If industry is subsidized then the natural forces that distribute resources between competing industries will be inhibited. Indeed if any obstacle, such as regulation, is placed in the way of infinitely clever economic actors arriving at necessarily the best outcomes then, necessarily, the world is worst off. At the Santa Fe Institute, two Nobel prize winners are using super-computers to model a world in which "adaptively intelligent man" replaces "perfectly intelligent man". The resulting economic models produce booms and busts, inflation and unemployment -- all in a free market. Market models with more realistic assumptions produce unstable and irrational results.

(F) Fuzzy exceptional problems