Introduction
Economics has always been a field of intense debate, and the disagreements between Keynesian and classical economists have been particularly stark. This piece explores the areas of agreement and disagreement between these two key economic schools of thought. Specifically, it delves into their views on borrowing and the role of government in the economy. The discussion is framed within a contemporary context, taking into account recent economic policies and theoretical developments.Areas of Agreement
Both Keynesian and classical economists share a common belief that borrowing can be used to address short-term economic downturns. This point of convergence suggests that even within their differing perspectives, both schools of thought recognize the necessity of fiscal measures to stabilize the economy in the immediate term.For instance, both groups acknowledge that during periods of recession or economic contraction, borrowing money can help 'patch' the existing economic gaps. They believe that this temporary borrowing can serve as a tool to mitigate the impact of short-term economic crises. However, beyond this shared understanding, the divide widens significantly.
A key area of agreement is that borrowing should be repaid during economic booms or good times. This principle reflects a common appreciation for fiscal discipline and the importance of maintaining a healthy balance in government budgets. When the economy is performing well, both schools of thought advocate for paying back the debts incurred during tougher times, ensuring that the accumulated deficit is managed prudently.
Disagreements: Borrowing and Economic Policies
Keynesian Beliefs on Borrowing
Keynesians espouse a philosophy where deficits are not seen as inherently problematic. They argue that the government can continuously borrow without significant repercussions, as long as the borrowing is directed toward financing public investment and social welfare programs. This view is grounded in the belief that government spending during recessions can stimulate aggregate demand, spur economic growth, and reduce the severity of unemployment and socioeconomic disparities.From a Keynesian perspective, deficits can be a necessary and even beneficial tool during economic downturns. They argue that government borrowing can be used to fund public works, education, healthcare, and social security programs, thereby promoting overall societal welfare. This philosophy suggests that deficits should be utilised not just as a short-term remedy but as a systemic approach to addressing long-term economic challenges.
Classical Economists' View on Borrowing
In contrast, classical economists, also known as conservatives, view government borrowing with more skepticism. They argue that continuous borrowing can lead to hyperinflation and other economic distortions, thereby undermining the stability and efficiency of the market. Classical economists stress the importance of fiscal responsibility and the need to maintain a balanced budget over the long term, even during less favorable economic conditions. They contend that relying on borrowing as a means of financial support can lead to moral hazard, where the government might engage in risky financial practices without fully considering the consequences.Moreover, classical economists often advocate for using fiscal measures as a last resort and prefer market-driven solutions over government intervention. They argue that borrowing should be limited to specific, well-defined circumstances and should be repaid as quickly as possible to avoid long-term economic imbalances. This perspective reflects a belief in the self-regulating properties of the market and the importance of maintaining monetary stability.
Quantitative Easing and Monetary Policies
Keynesians' Stance on Quantitative Easing
Keynesians support the concept of quantitative easing (QE) as a tool to stimulate economic activity, especially in the absence of other viable options. They argue that when traditional monetary policies prove insufficient, central banks can create new money to buy government securities or other financial assets. This process can help lower long-term interest rates and increase the money supply, which can, in turn, boost consumer spending and investment.A key belief among Keynesians is that QE can create a more favorable financing environment for businesses and consumers, thus fostering economic growth. They argue that under certain conditions, such as when interest rates are already at historic lows, QE can be an effective way to stimulate the economy without causing significant inflation. Keynesians often view QE as a means to bridge the gap between the present economic situation and desired economic goals, making it a flexible tool that can be employed in a variety of scenarios.
Classical Economists' View on Quantitative Easing
Classical economists, on the other hand, generally view quantitative easing with a degree of caution. They are more likely to support its use as a temporary measure, rather than as a recurring or long-term solution. One of the primary concerns for classical economists is the potential for excessive money creation to lead to inflation and distortion of the price signal, which can ultimately harm overall economic stability.For example, they might agree that during the acute phases of a recession, QE may help to inject liquidity into the economy, but they would argue that repeated use of QE can lead to systemic risks. They believe that the effective use of QE should be limited, and that the process of generating new money should be overseen carefully to avoid unintended consequences. The concern among classical economists is that repeated resort to QE can erode confidence in the monetary and fiscal systems, leading to broader economic instability.