CLASSICALS, KEYNESIANS, AND THE RECENT ISSUES

The Mark Thoma’s comment,

"I think the thinking of the libertarians and freshwater believers is that if there’s a recession, then the free market has a good reason for it. It’s a “real” business cycle phenomenon, and the best thing to do is let the free market have its recession or depression for as long as the free market wants (and we had some doozys before Keynes, and often). The Fed shouldn’t tamper with the free market, just like the fiscal branch of government shouldn’t. The Fed should just maintain zero inflation, or go on the gold standard. It shouldn’t try to manipulate the interest rates of the free market, or get involved in business cycles at all."

... Seems to be inspired by the supply-side economics, “supply creates its demand.” But, how supply creates its demand and in which situations is worth considering. Classicals never said that if you keep supplying TV it would create a demand even in the face when people are broke. What they mainly implied was either invention/innovation, because it was an age of discovery and inefficient markets, which attracts people to buy and compel them to work hard to get the objects of desire, or they meant increasing employment, income and demand by increasing the production and supply. Unluckily, the state of affairs as a result of recession caused by general overproduction and falling prices due to cheap credit availability has left the economy with lay-offs, salary-cuts, higher-unemployment rates and depressed demand, i mean reduced purchasing power in the hands of consumers. I think Thoma is talking about the case where over-supply and reduced prices are supposed to be matched by the same level of demand, given a certain level of purchasing power, but, here, that is not exactly the case. Where is the purchasing power? When Classicals said Free-market they took the demand for granted or they implied the same thing what Keynes called effective demand but somewhat differently, as explained before. And, even the notion of Classical Stationary-State has resemblance to the famous Keynesian concept of Liquidity-Trap, which a time period between low levels of economic activity and any innovation that shifts the Production-Function upwards, very similar to a period between recession or depression and changes in policies, a kind of innovation. From colonialism to great depression to the recent recession the common thread has been the experience of one or other kind of bottle- necks ranging from technology to raw-materials to labor to search of new markets and last but not least in our level of thinking. Lack of Innovation has been at the root of all the crises and entails all the above. A stationary-state comes where the level of consumption, responsible for high to higher level of economic-activity, ceases to increase and the incentive to invest also becomes zero. This is not a matter of criticizing either Classicals or Keynesians, at all, but only to point-out that the basics remain same either we choose the demand-side or the supply-side economics to affect the growth-rate and a closer look will reveal several common concepts, although the words used to describe them are different besides the time-frame. As far as inflation is concerned it does not only increase due to increases in money supply rather inflation is mainly the result of limited supply stocks. And, if there is enough supply of goods to absorb the increase in demand, increases in money-supply is not a great concern. Remember, “too much money chasing too few goods.” The problem of trade-off between inflation and unemployment by the Central-Banks should be supplemented by the Government attempts to boost the supply of stocks or goods/services and the Bank’s decision should be a little biased for reducing unemployment unless the inflation is too high. I think that’s a good growth plan.