Keynesianism and monetarism

In short: Keynesianism and monetarism are two influential schools of economic thought that give different answers to how the state should respond to economic fluctuations. Put simply, Keynesianism relies more on active government spending, monetarism on a steady monetary policy.

In more detail: Keynesianism goes back to John Maynard Keynes, who wrote in the 1930s against the backdrop of the Great Depression. Monetarism was shaped above all by Milton Friedman and gained influence in the 1970s.

In detail

• Aggregate demand: In the Keynesian view, demand can remain too weak for a long time, so that unemployment arises without the market quickly recovering on its own.
• Counter-cyclical fiscal policy: Keynesians recommend raising government spending or cutting taxes in downturns and doing the opposite in upswings.
• Multiplier: According to this theory, an additional unit of government spending can raise economic output by more than the original amount, because incomes are spent again.
• Money supply at the centre: Monetarists stress that, in the long run, inflation depends mainly on the growth of the money supply.
• Rule-based policy: Instead of short-term interventions, monetarists favour steady, predictable growth of the money supply.
• Scepticism about intervention: Monetarists warn that government steering often takes effect too late and can even amplify fluctuations as a result.
• Historical context: The stagflation of the 1970s, meaning high inflation combined with weak growth, weakened confidence in the Keynesian policies that dominated at the time.
• Today’s synthesis: Modern approaches combine elements of both schools; many economists see both monetary and fiscal policy as important tools but disagree about how much weight each should carry (geldpolitik-instrumente-der-zentralbank, konjunkturzyklus-grundlagen, stagflation-grundlagen).