Milton Friedman and the Monetarist School

The previous chapter outlined the strengths and weaknesses of the Keynesian approach, which has been largely disregarded since the early 1970s, after the first oil-price shock and the demise of the Bretton Woods regime. As a matter of fact, Keynesianism was unable to explain, hence to address, the simultaneous occurrence of high unemployment and high inflation rates. This chapter therefore explores the key elements of the theory that replaced it, namely monetarism. As is well known, this school of economic thought originated with the work of the University of Chicago professor Milton Friedman in the early 1950s. To be true, the 'monetarist' label was coined by Brunner (1968, p. 9), and Friedman never really appreciated it, preferring to refer to his own approach as the 'Chicago school' in order to point out its academic origins (Friedman, 1970, p. 1). Be that as it may, in the next section we present the historical framework within which Friedman proposed his theoretical appraisal of the working of contemporary economic systems. Inspired by the neoclassical approach, which considers that money has no influence on so-called 'real' economic magnitudes in the long run, Friedman aimed at elaborating a 'half-way station' between this approach and Keynesianism, which at that time was in fashion and according to which the money supply and other nominal variables play an important role in the determination of a number of 'real' magnitudes such as output and employment levels.