It’s been a long time since rival economic theories were of such political importance as they are now. Before 2008, the main political parties in both Britain and America were more or less united around a neo-liberal consensus – only really disagreeing on how exactly to share the proceeds of growth.

However, since 2008, growth has been hard to come by – reigniting old ideological conflicts between pro-stimulus Keynesians on the left and their pro-austerity opponents on the right.

But, actually, it may more be complicated than a simple left/right divide. In a brilliant review for the Times Literary Supplement, Tyler Cowen – a libertarian-leaning US economist – argues that the right is itself divided between two competing narratives:

  • “The first focuses on big government and policy uncertainty as the problems. The Obama recovery failed to match up to the Reagan recovery because President Obama expanded the role of government and disdained business, thus discouraging private investment…
  • “This narrative has found favour with rightwing politicians, but it is not sticking with the intellectuals. If true, it is hard to explain why US corporate profits are now measured at record highs (the Keynesian emphasis on weak demand has this problem as well).”

A good point, but what about the alternative rightwing narrative?

  • “An alternative account of what went wrong is sometimes called ‘neo-monetarism’ or ‘market monetarism’. In this view the American financial crisis and the Eurozone troubles have the common root of excessively tight monetary policy… With its reliance on central banks, this isn't exactly a ‘free market’ view, but it does suggest that with a few central bank adjustments the notion of a self-regulating market economy is very much alive and well.”

So, neo-monetarism all about getting central banks to print more money, is it? Not quite. Neo-monetarists see the “broader superstructure of credit and financial assets” as being much more important than the supply of currency that is directly controlled by the state.

Tyler Cowen agrees that pumping out more liquidity through this broader superstructure – i.e. private sector lending and investment – would be more effective than using government spending to stimulate the economy. However, he also thinks that achieving this outcome is more than a matter of monetary fine-tuning:

  • “Does the market monetarist movement hold all the answers? Not quite. It's worth trying to keep the broader monetary aggregates at robust levels of growth, but what happens when this is not possible? The danger is not so much Keynes's liquidity trap… as the private sector’s reluctance to lend… In the meantime, the authorities could prop up the monetary aggregates by printing more currency, but that's not nearly as useful as trust-based expansions of bank lending and private investment. In other words, undoing the damage from a credit collapse is not always easy.”

It is refreshing to hear an economist base his analysis on what happens between real people, in real places, in the real world. When things like trust-based financial relationships breakdown as comprehensively as they have done in recent years, no amount of fiddling with the knobs and levers of abstract economic policy is going to do much good.

And this, surely, is a truth that applies both to the monetarist levers and to the Keynesian knobs.