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John Maynard Keynes' work 'General Theory of Employment, Interest and Money' was written to the backdrop of the great depression of the 1930's. It set out a framework in which induced government to take a more active part in the growth of its nation. His ideas were based on some basic theories. For example he believed that people as a whole do not increase or decrease they're spending with the change in interest rates. This was in contrast to the classical view, which said that interest rates changed the pace of borrowing and spending. Keynes believed that a person would consume less in proportion with the more he earns. In other words, Keynes believed that the primary determinate of consumption was income and not interest rates; which he said was secondary and relatively unimportant.

Studies carried out seemed to indicate that Keynes was right in his thinking but when these figures and studies were borne out over a number of years it was found that the theory fails in the fact that it is perpetually contained in the short term. In contrast to this Milton Friedman put forward the theory of permanent income hypothesis. In this he argued that the average propensity to consume was related to the persons projected income over a number of years, that people would calculate an 'average' level of income and spend accordingly. Essentially the person would account for permanent income (the amount they are guaranteed to earn) and transitory income (the temporary change in income levels) and consume and borrow accordingly (Mankiw, 1994).

The fiscal versus monetary policy debate is still the issue that many associate these two schools of thought with. However in many ways the debate has moved on from this, both sides unwilling to back down but at the same time both unwilling to argue. Indeed in 2003 Milton Friedman renounced many of the policies from the 1980's that were based on monetarist views. In doing so he basically conceded that the demand for money is not easily predicted (Wilkipedia, 2003). However he does still stand by his basic formulations. The monetarists are in no way a new movement; in fact they are based mainly of the classical movement which Keynes counteracted after the great depression. The free and open economy with as little government intervention as possible and that market forces act quickly to eliminate unemployment were what they sought after. This is in direct contrast to the Keynesian view that the government should act to stimulate growth by spending heavily. In times of recession Keynesian economists believed the only hope is for the government to spend enough money to raise aggregate demand sufficiently to get people back to work. They could do this by the government printing new money or borrowing it. Keynesian economists felt that if enough newly created money was spent the recession would end (McGraw-Hill, 2002).

The monetarist school stresses the importance of the rate of monetary growth. The monetarists agree with the classical theory that when the money supply grows, the price level rises. So the basic Monetarist rule concerning monetary policy is to increase the money supply at a constant rate. Friedman said that when there is a recession, this steady infusion of monetary growth will pick up the economy and when there is inflation, a steady rate of monetary growth will slow it down.

In the 1960's President Kennedy put Keynesian policies into effect in the American economy. He was advised by his economic experts to introduce major tax cuts. There was much debate and many believed it would lead to lead to substantial inflation while Kennedy said it would stimulate the economy and reduce unemployment from its then level of 6 percent which was an increase of 3.2 percent in ten years. In the end both were right, unemployment dropped to 3.5 percent in 1969 while by the same time inflation rose to an annual rate of 6.2 percent. In many ways this example shows how this debate can never be won. The two sides argue policies that will constantly trade off each other. When one extreme is introduced then inflation, unemployment or other unpleasant effects arises depending on which policy. In truth the only solution is the combination of the two schools of thought in this area; a constant balancing act by governments and policy makers on whether to interfere or not and what cause will it have. In many respects this debate is over and has moved on with the notable exception of one major area, that of unemployment.

There are as many different views on economics as there is economists. The debate between these different schools of thought is most heated in the area of how to treat unemployment in the economy. The problem of unemployment can be seen as both a symptom and a cause of many of the problems that exist in modern society. When unemployment rises the burden on the taxpayer increases dramatically due to the increases that have to be made in social welfare. As more unemployment results in fewer people paying taxes, it means downgrading the schools, libraries, parks and police.

The Monetarists are of the opinion that to reduce unemployment the banks must essentially make more money available. For example the Bank of England increases the amount of money in the economy and then banks, possessing excessive reserves, make new loans and these loans create money. With a rise in the money supply comes a fall in interest rates. The combination of a fall in interest rates and more money in their bank accounts causes people to increase their expenditure, so aggregate demand increases (Parkin, King, 1995).

The Keynesian approach, while not directly opposing this method, believes more in the role of government. They say that the government should increase public spending to stimulate the economy and secure new jobs. In addition the government should borrow during times of recession to keep the economy moving while at the same time trying to restore confidence in the marketplace. Again this is the individual against the government. Monetarists presume that while everyone works the same way at an individual level then the marketplace as a whole will work the same way while Keynesian economists believe the markets need more visible and concrete encouragement. . .

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