Keynesian and classical points of view
In political science and economics, fiscal policy involves the use of government revenue collection and expenditure in influencing the economy. It is used in connection with the monetary policy which is implemented by the central bank to influence the economy using interest rates and money supply. The government intervention in economic activities has a significant impact on the progress of a country’s economy, employment and regulatory processes. The proposers of the fiscal policy are called Keynesian economists and while those who oppose government intervention in business activities are the classical economists. The classical economists believed in a long run of business activities with the purpose of providing long-run solutions. Keynes, on the other hand, believed that economists should first target the short run business initiatives (Nicholas 32). Therefore, the classic economic theory is rooted in the free-market theory which requires little or no government intervention to control the economic activities and allows the people to act in accordance with personal interest regarding the economic decisions. This allows for the allocation of economic resources according to the desires of the business and individuals in the marketplace.
In contrast, the Keynesian economic theory is dependent on spending and aggregate demand in defining the economic marketplace. The Keynesian economists argue that private and public decisions have a significant influence on the aggregate demand. Public decisions reflect the government intervention to control business activities while private decisions represent businesses and individuals in the economic marketplace. Keynesian economists believe that the nation’s money supply and fiscal policy can impact the economy significantly. Therefore, I perceive the Keynesian economy to be of much impact on the contemporary economy than the classical economic theory.
As argued by Mayer in Chapter 16 of “Everything Economics,” every business person ought to set goals as an individual and work in accordance with the public policies that control the marketplace. This is in relation to the Keynesians who believe that besides having personal decisions regarding business activities, government intervention is also necessary for the regulation of their activities through fiscal policy. The fiscal policy incorporates government revenue collection and spending of the collected taxes for the benefit of the businesses in the economic marketplace. Improvement in the economy is based on how the government manages and controls the people at the marketplace and Keynesians play a critical role in the expansion of fiscal policy to ensure it benefits the economy and overcomes recession.
Role for Government
Externalities refer to the results of economic activities that are experienced by people and are not related to the actual event. In chapter 3, Wheelan believes that the government’s crucial role in the society involves dealing with the externalities. As Wheelan argues, living in a well-functioning society and economy makes the government your friend and this applies to many individual cases. For instance, when there are mining companies in the society and the government sets up strict policies to control the pollution that may result from the mining activities, the people around that place are favored by the government intervention. Additionally, consider a society with efficiently regulated business activities, the government will possibly generate enough revenues and use it to sponsor the education of those around and thus, persistent developments are likely to be experienced. Through these activities, the government ensures that the society is not adversely affected by externalities.
Kaldor, Nicholas. “Keynesian economics after fifty years.” Essays on Keynesian and Kaldorian Economics. Palgrave Macmillan, London, 2015. 27-74.
Mayer, David A. The everything economics book: From theory to practice, your complete guide to understanding economics today. Simon and Schuster, 2010.
Wheelan, Charles. Naked Economics: Undressing the Dismal Science (Fully Revised and Updated). WW Norton & Company, 2010.