Finance and accounting free essay: Robert Skidelsky’s and Paul Krugman’s take on Recession Compared to Keynesian Theory
Robert Skidelsky’s and Paul Krugman’s take on Recession Compared to Keynesian Theory
The Keynesian economics explanation of recession and depression heavily relies on the premise that the actions of the public and private sectors have a direct influence on aggregate demand (Vitez, 2011, p1). The government plays an important determining factor regarding the manner in which the public responds to demand and supply using two important tools, namely monetary and fiscal policies. The author explains that Keynesian theory builds on the ability of the government spending to spur certain desired economic trends, such as inducing aggregate demand patterns. By avoiding a fall in aggregate demand, the government avoids excessive and wasteful supply, controls unemployment and shields the public from unprecedented fluxes in prices of consumer goods.
The free market masterly of consumer behaviour and its application in determining the performance of the economy is an important element of the private sector. Reaction of the market to unwanted effects can create general glut or recession by avoiding the burden, but the government chips in to rescue the national economy by jump-starting the appropriate response as a public protection outfit. In Keynesian theory, government spending and involvement in the economic equation are therefore incorporated into the classical explanation of how the economy responds to the free market forces of demand and supply (Tucker, 2008, p221). Recession can therefore be avoided by government intervention through fiscal and monetary policies according to the theory.
Robert Skidelsky position observed in several pieces of his work demonstrates the common knowledge that private and public sectors are equally important in the economy (Skidelsky, 2010, p1). The author points at the importance of harmonising government intervention with recovery of the private sector towards deficit reduction. It is evident that sustained recovery can only be realized through budget regulation, employment growth and economic growth on government input. Government policies mentioned in Keynesian theory are also revisited by the author in explaining how a well coordinated plan to tackle recession is developed.
In Kennedy and Skidelsky (2010, p1) there is a direct link between the need to mobilize government involvement in preventing total spending to sustain recovery from the recent recession. To consolidate recovery from recession, there must be a balance between public and private spending through involvement of the government. In the reduced spending of a recessed economy, the government can induce spending towards recovery by restoring spending in the economy to appropriate levels. To restore spending, the authors point at facilitation of economic activity by government introduction of its money into the economy by spending or introducing tax cuts. Elsewhere, Skidelsky (2010, p121) finds some points of departure from Keynesian postulates by indicating that some level of unemployment being experienced in world economies today is structured. In such a scenario, unemployment arises from associated capital and wage structures other than from consequences of aggregate demand. The author also finds fault in the creation of employment where productivity is not possible or in loss making ventures. However, general Keynesian postulates have been revisited by the author to draw recession inferences.
Paul Krugman explains recession to be a certain period of time when spending goes down since the economy does not support much activity (Meijers, 2010, p1). The author states that the unwillingness of the money in circulation being used for economic activities is due to preference to save instead of spending. Apparently, the author creates a relationship between high currency value with reluctance to spend which consequently lowers economic activity. For the appropriate correction or intervention, the author points out two important actions that the government can use. One of the interventions is induction of inflation while the other is printing of more money, but as a last resort intervention. Inducing inflation creates a drop in value of the money which consequently increases spending due to the general lack of meaning in saving valueless money. Printing more money will facilitate more currency circulation aimed at inducing more economic activity.
Drawing conclusions from the comparison made with Keynesian concepts, there is central role played by the government policy regarding countering recession. Printing of money to spur economic activity following reduction in level of market transactions directly involves the government through its policies. In Keynesian theory, the government influences the operation of the market through its policies, a fact that is well developed in explanation drawn from Krugman’s perspective. The recent economic crisis can be attributed to failure in government policies to spur the appropriate response from the economy (Krugman, 2010, p1). In the explanation, the author spots several flaws in handling of spending and deflation and mentions lack of governments caution regarding rising deficits.
Kenedy, M. & Skidelsky, R. (2010) Future Generations will Curse us for Cutting in a Slump. [online] Available from: <http://www.skidelskyr.com/site/article/future-generations-will-curse-us-for-cutting-in-a-slump/> [accessed 26 March 2011]
Krugman, P. (2010) The Third Recession. [online] Available from: <http://www.stltoday.com/news/opinion/columns/paul-krugman/article_54697b84-78a9-5304-add8-6059de88c26b.html> [accessed 25 March 2011]
Meijers, J. (2010) Inflation and Recession Explained by Paul Krugman. [online] Available from: <http://www.jessemeijers.com/inflation-recession-explained-paul-krugman/ > [accessed 25 March 2011]
Skidelsky, R. (2010) Distinguished Deficit Deniers. [online] Available from: <http://www.thereisabetterway.org/deficit-deniers/robert-skidelsky> [accessed 26 March 2011]
Skidelsky, R. (2010) Keynes: a very short introduction. New York, NY: Oxford University Press
Tucker, I. B. (2008) Macroeconomics for today 6th edn. Mason, OH: South-Western Cengage Learning
Vitez, O. (2011) What is Keynesian Theory? [online] wisegeek.com, Available from: <http://www.wisegeek.com/what-is-keynesian-theory.htm> [accessed 25 March 2011]
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