Discuss about the keynesian economists, Macroeconomics

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Discuss about the Keynesian economists

The Keynesian economist A. W. Phillips developed short-run Phillips curve analysis in the 1950s. Phillips had researched the relationship between unemployment and inflation over a 100-year period and found that there was a relationship between these two variables that could be exemplified as in the figure below

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The Keynesian economists of the1950s &1960s used this curve to present government officials with a 'menu choice'. They could pick either: high unemployment and low inflation (position B on the figure); or low unemployment and high inflation (position A on the figure).

The 1970's saw a prolonged period of mass unemployment and double-digit inflation which led to widespread disillusionment with Keynesian economics. The neo-liberal economic revolution associated with the 1980s governments of Margaret Thatcher in the UK and Ronald Reagan in USA was inspired by the revival of free-market economics.

Milton Friedman from the Chicago School was particularly critical of the Phillips curve for two major reasons. First, he argued that like Keynesian economics in general, the Phillips curve ignored the supply side of economy. In Friedman's analysis, government policy which merely stimulates aggregate demand will inevitably create inflation expect there is also a policy to increase the supply side. Henceforth free-market economists argue that if a government wishes to tackle unemployment it needs to remove obstacles to markets functioning properly like trade unions and unnecessary regulations and to use low taxes and the profit motive to create incentives for entrepreneurs and workers.

The theoretical roots of this thinking rested in a fiscal policy which advocates low welfare and low taxation benefits. By creating incentives to work, the government can encourage workers to sell their labour at a competitive rate. Furthermore by allowing businesses to make profits, business leaders will invest in the economy and raise the capacity of national capital stock. This will create more jobs and decrease inflation.

 

 


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