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4.2.3 An assessment

At this point it would be useful to draw together the material presented in this

section and summarize the central tenets that proponents of the quantity

theory of money approach to macroeconomic analysis generally adhered to

by the mid-1960s (see Mayer, 1978; Vane and Thompson, 1979; Purvis,

1980; Laidler, 1981). The central distinguishing beliefs at that time could be

listed as follows:

1. Changes in the money stock are the predominant factor explaining changes

in money income.

2. In the face of a stable demand for money, most of the observed instability

in the economy could be attributed to fluctuations in the money

supply induced by the monetary authorities.

3. The authorities can control the money supply if they choose to do so and

when that control is exercised the path of money income will be different

from a situation where the money supply is endogenous.

4. The lag between changes in the money stock and changes in money

income is long and variable, so that attempts to use discretionary monetary

policy to fine-tune the economy could turn out to be destabilizing.

5. The money supply should be allowed to grow at a fixed rate in line with

the underlying growth of output to ensure long-term price stability.

The Keynesian–monetarist debate, relating to the importance of changes in

the money stock as the predominant factor explaining changes in money

income, reached a climax in 1970, when Friedman, in response to his critics,

attempted to set forth his ‘Theoretical Framework for Monetary Analysis’.

Until the publication of Friedman’s 1970 paper there existed no explicit,

formal and coherent statement of the theoretical structure underlying monetarist

pronouncements. In opening up the monetarist ‘black box’ for theoretical

scrutiny, Friedman intended to demonstrate that ‘the basic differences among

economists are empirical not theoretical’. His theoretical statement turned

out to be a generalized IS–LM model which helped to place the monetarist

approach within the mainstream position (see Friedman, 1970a, 1972; Tobin,

1972b; Gordon, 1974). This debate represented the ‘final big battle between

Friedman and his Keynesian critics’ before the rational expectations revolution

and new classical economics ‘swept both Keynesianism and monetarism

from center stage’ (see Hammond, 1996). According to Tobin (1981), the

central issue for both macroeconomic theory and policy is the supply response

of the economy to monetary impulses. The division of such impulses

between prices and quantities was referred to by Friedman as ‘the missing

equation’. In Tobin’s view, Friedman’s solution to this problem ‘was not

different in spirit from the wage/price/output mechanisms of mainstream

eclectic Keynesian theory and econometrics’ (Tobin, 1981, p. 36).

In retrospect we can now see that Friedman’s debate with his critics demonstrated

that their differences were more quantitative than qualitative, and

contributed towards an emerging synthesis of monetarist and Keynesian ideas.

This emerging synthesis, or theoretical accord, was to establish that the

Keynesian-dominated macroeconomics of the 1950s had understated (but not

neglected) the importance of monetary impulses in generating economic

instability (see Laidler, 1992a). This was perhaps especially true in the UK in

the period culminating in the Radcliffe Report (1959) on the working of the

monetary system in the UK. According to Samuelson, a leading US Keynesian,

‘the contrast between British and American Keynesianism had become dramatic’

by 1959 because many of Keynes’s admirers in Britain ‘were still

frozen in the Model T version of his system’ (see Samuelson, 1983, 1988;

Johnson, 1978).