Keynesianism and Monetarism

Abstract

This article discusses the debates that began shortly after the publication of Keynes’s General Theory (1936) and the subsequent Keynesian Revolution. These debates were between economists who supported discretionary policies, especially fiscalism, to address unemployment—the Keynesians—and those who claimed that providing a stable monetary framework was the essential stabilization mechanism required by a decentralized market economy—the Monetarists. The debates encompassed all dimensions, being methodological, analytical, formal, and empirical, as well as addressing policymaking issues. The quarrel culminated in the rational expectations revolution initiated by Lucas and Sargent in the mid-1970s, rendering both orthodox Keynesianism and Monetarism severely outdated. While these economists appeared to be at odds with each other regarding the specific policies required to stabilize a monetary economy, over time, common threads in their analyses emerged, particularly with regard to rigidities and adaptive expectations.