Although still prominent in macroeconomic discourse, Keynesian theory is not without substantive criticism, especially from Monetarist and Microstate theorists. Monetarism roughly encompasses a multifaceted, heterogeneous family of theories that denigrate the Keynesian goals of full employment and reduction of income inequality in favor of stable and predictable expansion of the domestic money supply (Isukul et al., 2020; Masoga et. al., 2022). For such theorists, management of aggregate demand is still required during severe economic downturns, but such means should be employed sparingly, in accordance with rational expectation theory, and in keeping with realistic appraisals of implementation times and latencies in unemployment mitigation (Campbell & Pedersen, 2002; Sanusi et al., 2021).
Goodstadt argues that in geographically small countries (microstates) like Hong Kong with open borders, well-regulated monetary policies, and stable governments, the “invisible hand” sets prices quite adequately without substantive government intervention (2010). Unemployment and price hysteresis (lag between cause and effect) are frequently witnessed in Keynesian fiscal policies that frequently involve exacerbation of national debts: Asensio maintains that such features are inherent in the construction of aggregate demand and can exacerbate long-term price instability and inaugurate unsustainable inflation (2007). Monetarists may consequently be taken to converge substantively in opinion with Neoclassical economists in this regard (Lavoie, 2017; Cobanoglu & Ongan, 2017).
It is no surprise that longstanding Keynesian vs Monetarist debates center on the relative importance of stable expansion of the money supply through sound banking policies via retroactive investigation of prominent periods of economic hardship and recession (Hendry, 1988). For example, either a Neoclassical or Monetarist vantage considers the high inflation experienced by U.S. consumers during and after the COVID-19 pandemic as a failure of monetary policy and Keynesian policy at once (Barua et al., 2022). Post-Keynesian Critical Realism maintains that management of long-term aggregate demand (AD) is insufficient to maintain full employment and that short-term AD (termed “Effective Demand”) is a more precise measure of economic conditions due to the hysteresis exhibited by public-sector spending (Downward & Mearman, 2002).
Elevated rates of domestic inflation are plague for the Monetarist and Keynesian alike: Such conditions erode savings and induce a propensity toward self-perpetuating devaluation of currency (Agénor & Silva, 2014; Dash & Kumar, 2018; Fund, 2005). The intricate and multifaceted relationships between inflation and savings are not concurred upon by statistical economists (Taye, 2017; Muradoğlu & Taskin, 1996). Furthermore, in countries with relatively high inflation rates, empirical studies have found a statistically significant positive effect on saving; in countries with historically modest inflation sustained by sound banking policies, the effects tend to be of marginal statistical significance (Tatlıyer, 2017). In any regard, there is scant contemporary support for Keynesian notions of a theoretically calculable “money multiplier” that acts as a Rosetta Stone between the domains of government spending and long-term unemployment or consumer saving rates.
Dr Jonathan Kenigson, FRSA
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