Fiscal Austerity and Quantitative Easing: A Modern Monetary Critique of the Mainstream Neoclassical View

Abstract

Only by having a proper understanding of the function of money and finance in the economy can we hope to correctly inform decision making in monetary and fiscal policy. This paper will argue that neoclassical economics fails to do this, which results in suboptimal decision making from policymakers.

This paper will examine the origin and ontology of money with particular reference to the difference between fixed or commodity-based views of money on the one hand and more credit-based theories on the other. This will lead to a better understanding of the development of neoclassical theories of economics, where money is seen as fixed or neutral and simply facilitating exchange. I propose that a better theory is a heterodox theory of money and economics in which the credit-based nature of money is key to understanding the role of credit it in the economy.

In particular this paper will look at two areas of policy currently prevalent in economies that are suffering weak growth post the Global Financial Crisis. These are Quantitative Easing (QE) and Fiscal Austerity. The paper will analyse data from the economies of countries that have engaged in these policies in an attempt to establish the success or otherwise of the policies.

Furthermore, the paper will attempt to evidence my view that by applying theories from outside the mainstream schools of economics, such as the Modern Monetary School, we can better understand the failure of these policies to return economies to trend rates of growth and employment.

Keywords: Quantitative Easing, fiscal austerity, neoclassical economics, modern moetary theory

JEL Classification: E51, E52, E58, E62