Економічні науки/14. Економічна теорія

Marynenko N. Iu.

Ternopil Ivan Pul’uj state technical university

Macroeconomic processes: the Keynesian and neoconservative views

Starting the early 1950^th, there are disagreements in views on macroeconomic processes between Keynesians and neoconservators. Among these disagreements are the following ones:

1. Monetarists believe that the economy will usually be at full employment unless the government acts to destabilize the economy. In addition, monetarists believe in a faster time recovery of the economy on its own from a recession than Keynesians.

2. To the monetarists view most recessions have been caused by sharp decreases in the growth rate of the money supply. They point to the Great Depression (when the money supply was cut by one-third) and to the 1981-1982 recession (when the money growth rate was cut by one-half). Keynesians believe that recessions have been caused by the changes (dramatic decline) in investment spending (and consumer durable spending).

3. Economists have identified several key "lags" in using economic policy to affect the economy actively (which is called discretionary economic policy). Suppose the economy is in a recession. The first lag is the recognition lag: it takes time for the government to recognize that something is wrong with the economy. The second lag is the implementation lag: it takes time for the government to implement its policy and take action. The final lag is the effectiveness lag: it takes time for government action to affect the economy. If these lags are too long and if their length is uncertain, the effect of discretionary policy can be for the government to do the wrong thing at the wrong time. For example, a policy to dampen inflation may impact the economy later when it is in a recession, making the recession worse. Monetarists believe the government should steer a steady course by following a set of fixed rules. Keynesians, on the other hand, more readily advocate discretionary policy action, although many now reject trying to "fine-tune" the economy with continual discretionary policy action.

4. Keynesians believe that government spending can have a strong positive effect on the economy. Investments in basic research, in highways, and in related projects have produced very good results. Monetarists tend to doubt that most added government programs will be efficient.

5. Keynesians believe that if government spending is productive, then the higher taxes needed to support the government spending will not harm the economy. Supply-side economists and monetarists believe that taxes reduce aggregate supply (AS) and slow the growth rate of output.

6. Keynesians tend to believe the AS curve is flat (especially when the economy is in a recession) and is slow to shift up when prices increase. Monetarists tend to believe that the AS curve is steep and that it will shift up quickly when prices increase.

7. Some texts set forth the position that investment spending is insensitive to changes in the interest rate as Keynesian, which it is, but some texts then ascribe the opposite belief to monetarists [1, p.214]. They state this in the context of the Keynesian model of the short-run effects of money, where money supply affects aggregate demand only through changing the interest rate and investment spending. However, monetarists do not believe this is the main way monetary policy affects the economy (except, perhaps, in the short-run). Monetarists believe that more money causes people to spend more even if the interest rate does not change.

New Classical economists view Keynesian economics as follows:

1. “Failure on a grand scale.”

2. Made up of ad hoc assumptions, not built on a strong foundation of rational agents.

3. Must assume rational, optimizing agents.

4. Must assume that markets clear.

5. Keynesians do not explicitly handle expectations, and expectations have been shown to be critically important.

6. Have not given explicit structural explanations of wage stickiness.

Keynesian analysis is demand oriented while the supply-side economists do argue that excessive stimulation of demand and they shift in the emphasis of policy from the stimulation of demand to that of supply.

Over the years, neoconservators and Keynesians, by studying real-world data, have come closer in their beliefs about the economy. Almost all economists, for example, believe that very high rates of inflation can be caused only by high rates of monetary growth. Most monetarists acknowledge that fiscal policy can affect the interest rate (and thus velocity) and that increases in government spending have stimulated the economy in the past. Finally, most economists will predict a recession when the money supply's growth rate is decreased dramatically.

Literature

1. Walter J. Wessels. Economics. – 3rd ed. // Barron’s Educational Series, Inc., USA, 2000. – 593 p.