Innovative Approaches in Social, Human and Administrative Sciences

Abstract

Following the Great Depression in 1929-1934, John Maynard Keynes came up with a new macroeconomic system with his work “The General Theory of Employment, Interest and Money (1936)”. Keynes claimed that his system represents the developed economies and reflects realities more accurately.Keynesian policy recommendations in accordance with the Keynesian macroeconomic analysis were successfully implemented after the 1929 Great Depression and World War II, and consequently, business cycles, depressions and inflations were, to a great extent, eliminated. Moreover, through these policies, a noteworthy growth within a relative price stability was ensured. However, contrary to the Keynesian policy recommendations, many opposite tendencies started to be discussed in the academic as well as in the political circles. In 60’s and 70’s, during the Vietnam War, the United States, as opposed to the Keynesian economics advisors, had not increased the taxes to cover the increasing government expenditures because of the war. This lead both to budget deficits and balance of payments problems hence inflationary tendencies gained a continuous path. Again, as a result of wrong implementations of the Keynesian policies, public expenditures increased continuously in both the United States and European countries. This, eventually, gave rise to high inflation and unemployment rates due to this increase in the government expenditures and labor costs. Governments, on the other hand, rather than using the Keynesian fiscal policies for the fine-tuning of the economy, have kept raising the taxes continuously. Hence, contrary to Keynesian policy recommendations, the de facto implementation of tax policy was not successful. This is usually the case, because once the taxes are lowered, to raise it later seems impossible due to political and social reasons. In this case, especially in the United States, many anti-Keynes views have emerged, and these movements gained power from 70’s on. These new liberals recommended a small and balanced budget. Milton Friedman and New Classical economists working with rational expectations are among these groups. Moreover, Milton Friedman had recommended giving up on the fiscal policies and instead raising the money supply at a constant rate. New Classical economists working with rational expectations, on the other hand, claim that as long as there are no shock effects, neither the monetary policy nor the fiscal policy would be effective. They, too, recommend a small and balanced budget and decrease in government expenditures.Today, globalization, liberalization of international trade, free flow of capital and funds have emphasized again the price stability and productivity because of international competition, hence policies to a great extent in accordance with the Keynesian policy recommendations are being recommended this time by the New Keynesian economists in the USA and Post-Keynesian economists in Britain.In conclusion, the appropriate choice of the right policy necessitates a thorough understanding of the Keynesian System and a thorough consideration of the efficiency of monetary and fiscal policies in terms of increasing the real income level for different periods and economic conditions as well as a thorough considerations of the factors affecting the choice of these policies rather than efficiency only, like the changes in the composition of income and time require for a policy to show its effect.