Explaining the Pro-Market/Monetarist and Anti-Market/Fiscalist Correlation
By Bryan Caplan
Austrians and hard-core libertarians usually jointly dismiss monetary and fiscal policy. But among more moderate economists, there’s a long-standing tendency for pro-market views to correlate with a preference for monetary over fiscal policy. Friedman and Samuelson are the classic examples: Friedman combined highly pro-market views with a strong belief in the macroeconomic power of monetary policy and impotence of fiscal policy, while Samuelson combined rather anti-market views with a strong belief in the macroeconomic power of fiscal policy and far less confidence in the power of monetary policy. The generations of economists that Friedman and Samuelson taught usually bought the same intellectual bundles.
On reflection, these intellectual bundles are puzzling. Fiscal policy encompasses not just spending, but taxing as well. So when anti-market economists see a downturn and demand more government spending, pro-market economists could insist that tax cuts are just as good a solution, if not better. Indeed, in turns of libertarian purity, belief in the power of fiscal policy allows pro-market economists to claim that all government has to do in a downturn is “get out of the way.” Belief in the power of monetary policy, in contrast, requires pro-market economists to advocate additional government action in the face of a downturn. Remember: Friedman’s critique of the Great Depression is that the Fed didn’t do enough.
Question: Is there any good explanation for the pro-market/monetarist and anti-market/fiscalist correlation? Or is the right story mere happenstance and path dependence?