A chicken-or-the-egg debate pits US economic theorists. `First cousin' to monetarism proves highly accurate

``Macroeconomics continues to be in disarray.'' That's how Michael W. Keran, chief economist of the Prudential Insurance Company of America, describes the big picture in economics that deals with issues like national monetary and fiscal policy, unemployment, inflation, and growth.

Economists always differ in their economic analysis and forecasts for business activity. But because of what Mr. Keran describes as ``an intellectual vacuum'' in economic theory, there are probably more predictions based on ``seat-of-the-pants'' reviews of a broad array of statistics and little economic theory in recent years than has often been the case in the past.

The consensus of 51 economic forecasters compiled by Blue Chip Economic Indicators calls for real economic growth next year of 2.6 percent. This is well below the recently revised Reagan administration's estimate of 3.5 percent.

Moreover, within that consensus, forecasts range from 4 percent growth in real gross national product, from Charles Reeder Associates, to minus 1 percent, by Business Economics Inc. Keran's forecast is the second lowest, at plus 1.5 percent.

During the 1970s and early '80s, monetarist theory was highly popular among economists. Milton Friedman, then at the University of Chicago, argued that, in the long run, changes in the nation's money supply could affect only the price level - with a lag of two or three years. In the short run, however, changes in the amount of money created by the banking system could also affect the business cycle, causing more growth in output or a decline in business activity.

Monetarism was in some ways a revival of what is called ``classical'' economics, outlined by such historical figures as Adam Smith.

In the 1970s there was a keen debate between the monetarists and the advocates of the theories of John Maynard Keynes, whose key work, ``The General Theory of Employment, Income, and Prices,'' was published in 1936. His explanation of the Great Depression was seized eagerly by many younger economists.

The monetarist approach to forecasting, however, proved clearly superior in the 1970s, explaining the phenomena of both inflation and unemployment rising at the same time.

``It was the monetarist reality, rather than the subtlety of the analysis, which carried the day,'' Mr. Keran says.

Unfortunately, in the '80s the monetarist analysis has broken down. It could not explain the decline in inflation after the 1981-82 recession. Forecasts by monetarists were no better, if not worse, than those by economists who had stuck with a modern version of Keynesian theory.

Nowadays, economists are groping for new economic theories to back their forecasts. Keran, for example, has developed what he terms ``a first cousin'' to the monetarist approach. He looks at the implications to the economy of changes in interest rates.

``The intellectual foundations of this approach go back to the late-19th-century Swedish economist Knut Wicksell,'' Keran explains. ``He argued that the private market determines a supply and demand for credit. He called the interest rate, which is determined in the credit market, the [natural or] equilibrium interest rate. The central bank, through its control of the money supply, can affect the actual interest rate. The deviation between the actual and equilibrium interest rate is the measure of macroeconomic policymaking, which can affect the business cycle.''

Using this theory, Keran's forecasts have been highly accurate in the last two years or so. He's now calling for a sharp slowing in GNP and a possibility of a recession, starting in the second or third quarter of 1989.

Another economist, Lacy H. Hunt, of Wall Street's Carroll McEntee & McGinley, figures he can make better forecasts by looking at world money trends. ``In this new global environment, the relevant issue is not domestic monetary growth, but the global liquidity pattern,'' he says.

At the moment, domestic money growth is tight. But the global money growth has accelerated substantially.

So Mr. Hunt expects world growth next year to be faster than the widely held view. He adds: ``Accelerating world money growth also implies that world inflation rates in 1989 and 1990 will be higher than generally expected and that the major central banks may soon be tightening their policy in order to control the monetary expansion.''

While economists are devising new or altered theory to help them make forecasts, the Federal Reserve System appears to be operating on what could be called pragmatism. If the economy slows, it steps on the monetary gas. If the economy is running fast and inflation worsening, it steps on the money brakes lightly.

Because of the lag between monetary action and its impact on the economy, business activity may engage in a modest roller-coaster movement. But Keran and others maintain that the Fed may avoid serious recessions or rapid inflation.