The rising debt stock in the western world in general and sovereign debt crisis in Europe in particular, which is forcing governments to cut expenditure at a time when the economy is struggling to grow has once again brought forth the debate on the role of the government and the relevance of Keynesianism. The battle lines in the US presidential election, due later this year, has further added flavour to this discussion, possibly the most intellectually divided debate of the 20th century.
The keynesian debate
Keynesianism or Keynesian economics is basically based on the ideas put forward by 20th century British economist John Maynard Keynes. The publication of the book The General Theory of Employment, Interest and Money by Keynes in 1936 was a revolution, which changed the fate of the dismal science forever. Keynes challenged what was till then conventional wisdom that markets would adjust automatically, including the labour market. This (pre-Keynesian economic thoughts) was also termed as classical economics. However, nothing of that sort happened during the Great Depression and assumptions of classical economics fell apart. Alternatively, Keynes, during the depression, apart from introducing complicated concepts, argued in favour of government intervention to smoothen the business cycle. Writes Robert Skidelsky, the biographer of Keynes in Keynes: The Return of the Master (2009): “Keynes believed that deep slumps were always possible in market system left to itself, and that there was therefore a continuous role for government in ensuring that they did not happen.”
The Keynesian idea dominated the profession of economics and policymaking in the western world in the post-war period, though there is no consensus among economists whether the Depression ended because of Keynesian ideas or because of the needs of World War II. But Keynesianism took a backseat with the onset of stagflation— a combination of stagnation and high inflation—in the 1960s-70 and the emergence of monetarism and free market.
However, the free market economics again hit its limits with the “Great Recession”, which started in 2008, and Keynesian economics was back with a bang. But, again, before Keynesians could declare the final victory in this battle of ideas, challenges have emerged in the shape of sovereign debt crisis in the developed world and the role of the government is again being questioned. While this battle of ideas will continue, the debate remains as open and interesting as ever.
The Indian case
In India, it is argued that it is not the lack of government control, but excess of it that has been the source of macroeconomic problem over the years. Although the government opened up the economy in 1991 in favour of markets, it remains the biggest dominating factor, running large deficits and micro managing the economy.