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Keynesian Theory

Keynesian Theory

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Keynesian Theory

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Keynesian Theory

In any economy, a recession is a part of the economic cycle. Sometimes there is a boom and other times there is a recession due to the imbalance of the equilibrium or the economic shortcomings. For this reason, it is very important for the government to be vigilant and act accordingly because eventually the government's intervention is needed to resolve the matters. This happens because the market cannot always work efficiently on their own and intervention is necessary from the state's side. There are some contradictions in some economic schools of thought related to government intervention at times of recession. Keynesian economics believes that government should start spending more and adopt the policies of government investment in crucial areas like infrastructure or lowering the interest rate so that the gap can be reduced. Austrian economics, however, disagree at this point and suggests the otherwise i.e. reduction in government spending, increasing the interest rate, increasing tax, cutting down the salaries of the official employees. Both perspectives are in conflict with each other and make the situation more complicated. Greece opted for the Austrian approach and made the people angry with unfavorable economic policies but ultimately saved the economy from incurring more loss (Forbes, 2012). The stock exchange performance was improved by this and currency was also revaluated drastically. But with all the positive changes, higher interest rate led to more risk for the investment in the economy. Keynesian view argues here by telling that the Austrian approach will lead to inflation in the economy and will reduce the aggregate demand for the general public (Harbey, 2013).

Looking at both the approaches, it is made clear that it is more important to study the structure of the economy before adopting many policy formations. The Keynesian approach can work better for economies which are lacking behind in development and the Austrian approach is good for those economies that are already economically stable. The Keynesian approach will benefit more in the short term while the Austrian approach is good for the long term for the economy during a recession.

References

Risk On, Austerity Wins In Greece. (2019). YouTube. Retrieved 26 February 2019, from https://www.youtube.com/watch?v=SyE_J5Ei1dY

Harvey, J.T. (2013, May 1). Austerity leads to…austerity! (Links to an external site.)Links to an external site. Forbes. Retrieved from http://www.forbes.com/sites/johntharvey/2013/05/01/austerity-leads-to-austerity/

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