Non keynesian effects

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FionaK
view post Posted on 8/1/2012, 23:39 by: FionaK




In this country we have been hearing a lot about a theory which I suppose is aimed at countering Keynesian criticism of the austerity measures currently being applied in time of recession.

According to Keynes governments need to spend when there is a recession. As people get poorer they don't buy as much: and as companies get scared they pay off debt instead of investing. Which means there is not much money about and no jobs. So people spend even less and companies sell even less; and there is even less money about: and you end with a Great Depression unless someone does something about it. The only body which can do anything about it is government: they can print money and they can build infrastructure or anything else: which creates jobs and stops the vicious circle. This is called counter cyclical spending

According to neoclassicists governments need to spend less in a recession because they need to balance the books. To them the problem is overspending and once that is reduced the economy will come in to balance and all will be well. The idea is that we had a party on credit and so we need to pay the bill: once it is paid we will be back on a strong financial footing and we can go onward and upward.

I was a bit confused about how the latter is supposed to work. I can see that if I, as an individual, got into debt, then if I cut my spending eventually I would pay it off and be back to having the use of my wages. But an economy is not like an individual: because paying off my debt does not reduce my wages. In an economy it does precisely that: paying off debt cuts demand and that effectively cuts GDP.

I was interested to learn that there is more agreement between the two schools than I originally thought: the neoclassicists agree that demand has to be supported if we are to get out of trouble: I did not know that because earlier versions of the theory proposed no mechanism beyond the natural tendency for economies to tend to equilibrium all by themselves: and we know that does not work because we tried it in the 1930's and it didn't.

But there is a new mechanism. It is called "expansionary fiscal contraction" or as in the title of this post "non Keynesian effects" I have heard the former term for quite a while because our chancellor Mr Osborne is fond of it. I did not know what it meant. But I do now, I think. Not surprisingly it is an idea which the IMF likes: probably the EU and the World Bank as well, for all I know.

The idea is this: If the government cuts spending the adverse effects, as outlined by Keynes, will be offset by the private response. Folk will see that tax will not go up and so they will run out and buy stuff. In all seriousness that is what they say: I am not making this up.

 
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3 replies since 8/1/2012, 23:39   89 views
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