Keynesian economic theory recommends government manipulation of aggregated demand by rising spending, lowering taxes, and incurring debt during recession and pursuing the opposite policies during inflations”. Discuss the pros and cons associated with the Keynesian theory and how policy makers can improve upon the theory.Keynesian economic theory has suggested government involvement in modification of the aggregate demand by increasing spending, decreasing taxes and acquiring debt during recession and implementing the opposite during periods of inflation. There are several advantages and disadvantages associated with this recommendation of Keynes. The Keynesian theory allows higher employment even in the recessionary period. Considering the fact that in the periods of recession, unemployment falls but when government make investment in the projects of public works then this directly improves the employment.
The theory also facilitates the banking industry stabilization, the government intervention in the guarantee loans make lenders increasingly confident in giving the required capital in the consumer markets and business. The theory provides new tools for monitoring the economic output of the country. Keynes have developed precursor to GNP i.e., Gross National Product that has allowed the government to predict inflationary and recessionary cycles.
But the theory also has several drawbacks such as it the theory of Keynes allows the government to increase spending during the period of recession that calls for restraint of the government in a rapidly advancing economy. Hence, this prevents increase in the demand and encourages inflation (De Carvalho, 1997). There is another disadvantage that there is a lag between the government need recognition and real implementation of the appropriate and proper policy measures. The policy making procedure sometimes is itself responsible for delay in acceptance and implementation of the measures associated with policy.
In order to improve Keynesian policy, the policymakers should try to frame such an efficient policy that is free from the adoption as well as implementation lags. The policy should be such that it makes the actors to work quickly according to the requirement of the economy so that timely management and control can be made possible. The policy makers should frame such policy that has good impacts in long run. The Keynesian theory proves successful in short run (Kohn, 1986). For example, increasing government spending can be beneficial in short run but as a matter of fact in the long run, our future generation will suffer, so they should improve this suggestion of Keynes by making a significant policy that meet long term objectives for the betterment of economic conditions in the long run.
De Carvalho, Fernando J. Cardim. (1997). Economic Policies for Monetary Economics: Keynes Economic Policy Proposal for an Unemployment –free Economy, Revista de Economia Politica, 17 (4), 31-51
Kohn, Meir. (1986). Monetary Analysis, the Equilibrium Method, and Keynes General Theory. Journal of Political Economy, 94(6), 1191-1224