Question

Keynesian vs. Classical

1. We already know that politicians disagree on how to fix the economic problems. It's not just politicians, economists also disagree.

When the recession hit back in December 2007, first President Bush then President Obama responded quickly with stimulus packages that included tax cuts and spending increases. Several economists such as Paul Krugman and Robert Reich backed this approach as they believed Keynesian policies would restore the insufficient demand and bring the economy back to full employment level. Yet, most Republicans and some other economists such as John Taylor and Gregory Mankiw disagreed with this approach and they claimed that more stimulus would create more uncertainty in the private sector and eventually lead to a debt crisis.

What do you think?

Were the expansionary fiscal policies implemented since the beginning of the Great Recession the right policies or should the government have stayed out of the way and let the market clear itself?

Answer 1

Introduction & Specifics

The Keynesian and Classical schools of thought, have widely been debated across the globe as to which one is more accurate in dealing with the problems which arise in an economy.

Some economists argue in favor of Keynesian economics in which they believe that government intervention is an important segment to control recessions or inflationary pressures, while others still believe that markets should be allowed to function and the forces of demand and supply would correct themselves.

Both these schools of thought have the same central motive which is to stabilize the economy, and make it a better place to live in and allow higher economic growth and progress.

However, in my opinion, the Keynesian Model, which advocates for the need for government intervention to deal with the problems of recession or inflation is more receptive and can lift the economy much faster than a market based correction which has little impact in a short period of time.

Reasons & Explanation:-

Recession takes place as a result of decline in demand for goods and services being sold in the economy, which further results in producers cutting down the production and employees losing the job. The motion is circular in nature wherein one factor is linked to another due to the nature of market forces.

If left alone, these factors cause a huge bubble to occur which if unchecked effect all sectors of an economy. The private sector is very pragmatic in its approach, their aim is to earn profit and they would not bear losses to increase demand in the economy it leads to inefficient organizations which work in losses.

The government on the other hand, has enough reserves and can use taxation to stimulate demand, which results in higher flow of money in the hands of people and increases the net demand for goods and services. More so, in developing or underdeveloped economies, markets are not developed enough to stimulate this kind of growth and bring back the economy on track.

Thus, in my belief government intervention is an important tool to tackle with market problems of demand and supply. The Federal Bank, the Fiscal and Monetary Policies as tools cannot be ignored because of their strong strength in handling with market problems. Most markets are not competent enough to manage recession and inflation issues & even when the strength of the United States is known to the world in terms of its economic power, yet the market found it tough to manage itself without active steps from the government in managing the Great Recession respectively.

Please feel free to ask your doubts in the comments section if any.