Chapter 7: A Critique of Monetarist and Keynesian Theories

In this chapter we will criticize alternative theoretical developments aimed at explaining economic cycles. More specifically, we will consider the theories of the two most deeply-rooted schools of macroeconomics: the Monetarist School and the Keynesian School. According to the general view, these two approaches offer alternative, competing explanations of economic phenomena. However from the standpoint of the analysis presented here, they suffer from very similar defects and can thus be criticized using the same arguments. Following an introduction in which we identify what we believe to be the unifying element of the macroeconomic approaches, we will study the monetarist position (including some references to new classical economics and the school of rational expectations) and then the Keynesian and neo-Ricardian stances. With this chapter we wrap up the most important analytical portion of the book. At the end, as an appendix, we include a theoretical study of several peripheral financial institutions unrelated to banking. We are now fully prepared to grasp the different effects they exert on the economic system.