Keynes vs Monetarists

An interesting article appeared in Mint (WSJ of India) couple of days ago. It talks of Keynesian economics (his solution for 1929 depression was to dig roads and fill them)- which believed in fiscal stimulus and the monetary economics -- which believes in controlling economy through interest rate changes.

today we are in an era where fiscal discipline is assumed (so keynesian economics is dead) and monetary policy is used the world over. in india also, over the past few years we have seen importance of budget being reduced and it is the RBI's policy which is eagerly awaited.

fiscal deficit works if it reaches the intended beneficiaries-- thus dig roads and fill them would lead to money reaching the poor -- but if fiscal deficit goes to fund subsidies, it has proved disastrous-- recent examples would be countries like Argentina, Brazil, Zambia etc.

monetary policy also has to be used carefully--- if its focus is only inflation control, which is how it is being used world over, will hurt growth--- too much tightening hurts growth and too liberal would lead to excesses in economy including asset bubbles, as has happened in USA.

it is my view that our current set of policy makers are all strict monetarists--- Dr. Manmohan Singh, Dr Rangarajan and YV Reddy and their policies are hurting growth. also strict monetary policy would assume fiscal discipline which is lacking in India.

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Views
Keynes has a lot to teach us
John Maynard Keynes was born 125 years ago this week. Three giants —Keynes, Milton Friedman and Friedrich Hayek— dominated 20th century economics and continue to be relevant in this century.  Keynes had led a successful revolution against the mainstream economics of his time. He was also a man of practical action. Keynes has been closely identified with a style of economic policy which believes that monetary policy is often toothless and that fiscal policy is the best antidote to slowdowns and recessions. This was the conventional wisdom in the three decades after the end of World War II. A very crude version of Keynesian policy even went so far as behaving as if huge government deficits were not much of a problem. There was often a gap between what the great man said and how his many disciples interpreted him. The Keynesian consensus fell apart in the 1970s as stagflation gripped the Western world. Monetarism made a comeback, and since then we have come to believe that central banks hold the key to stable economies. The successive bubbles blown by central banks over the past decade and the growing power of financial markets has cut into both the credibility and efficacy of monetary policy. There are signs that fiscal policy is making a comeback. Even the International Monetary Fund has softened its opposition to bigger fiscal deficits. (Fiscal deficits of the type India has will continue to be a worry.) But there is another Keynes who has a new relevance in our times. He was a student of probability. Uncertainty and expectations play a big role in his economic writings. He believed that investment in an economy is driven by something as subjective and psychological as "animal spirits". Keynes was also a master speculator. He understood both power of financial markets and their shortcomings. "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done," he famously wrote. How true.