The debate between Monetarist and Keynesian theories of money might seem academic, but its implications are actually relevant both to economic policy and everyday investment decisions. Understanding some of the major contrasts in these two schools of macroeconomics helps to inform assessments of risk and expectations for economic growth.
Theories of Money
A theory of money is an explanation developed by scientists in the field of economics that are intended to explain the relationships between market or policy decisions and money, the preferred medium of exchange in the marketplace. Theories of money are highly complex, and can vary considerably among different schools of thought . Macroeconomics -- the study of economic decisions on the large scale -- often has applications in private and public policy decisions intended to produce economic effects, such as productivity growth, lowered unemployment or stable price levels, for example.
Keynesian Theory of Money
The Keynesian theory of money is primarily supported by the academic followers of John Maynard Keynes, an early 20th century economist who proposed alternatives to classical economic theories. In the Keynesian theory, the economy was divided into two basic features: the "real economy," which determined factors of material production such as labor, and the "monetary economy," which affects factors of valuation such as price level. Keynesians generally believe that events in the real economy, such as reduced labor demand or government fiscal policies, have a greater effect on economic growth or recession than events that affect the supply of credit or money alone.
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Monetarist Theory of Money
As their name might suggest, monetarists are particularly interested in the economic effects of policies regarding the size and structure of the money supply -- questions regarding price levels, the value of currency and the availability of credit. Monetarist academics are generally followers of the theories of Milton Friedman, a macroeconomist of the mid-20th century. In general, monetarists believe that practices and events that affect the amount of money available for use by the economy have a more substantial impact on short-term productivity than do factors such as employment levels, aggregate demand or government fiscal policy.
The debate between Monetarist and Keynesian theories of money is often raised in times of economic recession, when productivity declines and unemployment levels rise. Keynesian economists often seek to address weak economic conditions using fiscal government stimulus -- efforts to increase government expenditure, lower taxation and invest in long-term productive output -- with the expectation that these policies will increase economic demand. Monetarists, by contrast, are more interested in increasing the supply of money available to lenders and businesses, with the expectation that easier access to credit is more effective in generating productive growth. Governments and central banks often enact policies to respond to recessions that are based to some degree in both theories of money.