Explain demand management of keynesian economists, Macroeconomics

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Explain demand management of Keynesian economists

The demand management of Keynesian economists of 50's and 60's is attacked by free-marketers for ignoring the importance of supply side and using fiscal policy as a blunt instrument to manage aggregate demand. Free-market economists warn against changing levels of taxation in a flexible way to manage aggregate demand particularly income and business taxes since this sends confusing messages to entrepreneurs and workers, distorting long-term labour market incentives.

Though this doesn't mean that there is no place for demand-side policies in supporting macroeconomic performance. Globalised market economy is disposed to to volatility and unpredictable economic crises. In the last 15 years UK economy has been considerably affected by stock market crashes comprising the Asian crisis 1997/98, the dot.com bubble and terrorist attacks of 2001 banking crisis in 2008 and deep global recession which followed this crisis.

In such periods there is a definite need for government action to prevent the economy plunging into a deep recession. The 'animal spirits' that Keynes warned of in the 30's still exist today. Certainly one of the greatest dangers is when a market becomes paralysed with fear. Had Labour's Chancellor, Alistair Darling, not intervened in British economy in October 2008 to bail out HBOS and RBS and inject billions of pounds into the financial markets to restore confidence, it's possible that entire British banking system and economy could have collapsed.

 


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