Introduction of Friedman’s vs Keynes Monetary Theory

Monetarist economics is a direct criticism of Milton Freidman on the economic theory of Keynes that John Maynard Keynes formulated. Freidman involves the money control in the economic matters while the economics of Keynes involves taxation and expenditure of government of the state. Controlling the money supply was believed by monetarists that are flowing in the economic market while allowing the markets of demand and supply to be fixed itself. In contrast, it is believed by Keynesian economists that the economy that is in trouble continues in the spiral that so downward unless an intervention by the government of state drivers the consumers in that economy to buy more services and goods.

Monetarist and Keynes Monetary Theory: Similarities

The original monetary theory was put forth by the monetarists’ economics that is known as the quantity theory of money and it was said that the money amount that is in circulation had a powerful and direct impact on market prices and this phenomenon seems intuitive. Although Keynes agree on the point, he believed that this phenomenon is not that much easy and simple and the phenomenon is different for the long run and short run. Friedman and Keynes agree on the point that prices are increased by money supply but the controversial thing is that how much time is required. Stickiness is exhibited in prices that prevent to be changed in the short run as a response to the supply of money.

Monetarist and Keynes Monetary Theory: Difference

The difference in monetary theories of Friedman and Keynes basically lies with the treatment of velocity of money component in the quantity equation of money:

In the above equation M represents money stock, V represents the velocity of money, P represents the level of price, and Q represents the output of the economy. It is assumed by monetarists velocity of money remain predictable as well as stable but it is not constant. According to Freidman, velocity basically depends on multiple factors such as technology as well as payment in exchange. On the other hand, it is believed by Keynes the velocity of money is unpredictable and variable. The reason is that Keynes believe that a change in interest rate and money supply determines velocity as well, for speculative purpose as well as transaction purpose. According to Keynes, therefore, the velocity basically depends on public preferences regarding the public division between asset balances and transaction motives.

Conclusion of Friedman’s vs Keynes Monetary Theory

In a nutshell, Friedman and Keynes both presented their monetary theory; the monetary theory was first developed by Friedman who is a monetarist economist and the monetary theory is known as the quantity theory of money. The monetary theories of Keynes and Friedman have similarities as well as differences. The main similarity is that the velocity of money causes the change in the price level. While the difference lies in the nature of the velocity of money. According to Friedman, the velocity of money is stable and predictable while Keynes believe that velocity of money is unpredictable and variable. The emphasis of Keynes is on volatile flows while Friedman emphasizes on wealth stocks that means that greater macroeconomic stability should be implied by the stock views.