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Crisis in Keynesian Economics

Crisis in Keynesian Economics

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Published by: Appan Kandala Vasudevachary on Mar 21, 2014
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Crisis in Keynesian Economics
The Structural and cyclical crisis of the 1970’s especially the 1974
-75 crisis, and the inflation which became chronic and irreparable. All of this taken together disrupted the economic policy and led to obvious confusion as to how the economic difficulties were to be tackled. There was a collapse of the standard Keynesian schemes of business cycle policy, according to which efforts were made to contain inflation, which usually coincided with the upward phase, by limiting demand, and to overcome the crisis by expansionary demand. Another phase in Keynesian crisis is that disenchantment with Keynesian economics developed during the post 1968 period when the rate of growth of output declined. The rate of inflation increased coupled with rising unemployment. This paradox of
‘Stagflation’ is inconsistent with the tenets of Keynesian economics. This led to
reconsideration of theories underlying policy making and rival school of thought
such as ‘
monetarist
school’
represents a return to orthodox classical economics and its recent more formal statement the new classical macro economics.
Stagflation as defined by PA Samuelson refers to “Stagflation of growth and
employment
at the same time that prices are rising”. It occurs due to various
reasons like shortages and irregular supply of raw-materials, insufficient demand, and power shortages and, various obstacles to growth.
 
Monetarism The origin of monetarism may be traced in the writings of long line of University
of Chicago’s distinguished teachers and students represented by Milton
Friedman.
K Brunner was the economist who used the term ‘Monetarism’ in 1968.
The monetarist school include Phillip Cagan, James Schlesinger, Leon all Anderson, Meiselman, AH Walters and Allan Meltzer. Monetarism basis lies in the age-old Quantity Theory of Money of 18
th
 Century. So that the QTM is the basis for monetary frame work.
Monetarists are the supporters of the ‘Free Market’ beli
eve that all economic problems have their solution in the free and unimpeded operation of the market forms of supply and demand.
Monetarism refers to the followers of Milton Friedman who hold that “Only Money Matters”. It attributes
the economic variation principally to changes in money supply. They said that the government interference with the working of market forces has mostly failed. According to Milton Friedman, regulation of money supply is one such area where government control is called for but this control must be controlled. Henry Simon who observed that government must provide a monetary
framework for a competitive system, but this should be operate under the ‘Rules of Law’ and not under the discretionary powers of the administration.
 In the wake of Keynesian revolution, the emphasis shifted from monetary policy to Fiscal policy. This gives rise to the fiscal school includes James Tobin, P Samuelson, W Heller, L Klien, Modigliani
who suggest the “Money does not matter”.
 
Since 1930’s thi
s debate has continued, and presently the academic opinion has veered more and more round the monetary fiscal mix.

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