Question

Nowadays, most economists believe that “if left alone by government, markets quickly self-adjust.” This theory is based on the Say’s Law, who claims that “supply creates its own demand.” However, others support Keynesian theory claiming that proper government policy could correct the problems more quickly in the short run. “In the long run, we are all dead.”

List the key arguments for each side of the hands -off versus hands - on debate.

Which political party in your country supports a hands-on approach by government?

From your own current experience and economic understanding, which side of the macroeconomic debate do you tend to support? Explain your answers by providing real-life examples. What might make you change your mind.

Answer 1

Say's law claims " supply to be creating demand " which was first termed by James Mill while on the other hand Keynes law states " demand creates supply". But now coming to the fact which is more accurate is little tricky as from time to time history has set examples on both Say's law and Keynesian theory.

Explaining Say's laws - why supply creates demand ?

If a buisnessman produces good he will be keen to sell it, wages paid to workers could help in buying the products and create demand for it. Thus both the buisnessman and worker gets money.

Say's also argued that it is irrational to hoard money because buisness man is most anxious to sell immediately otherwise inflation may reduce value of cash.

This theory further assumes that market is clear and buisnessman creates good that are demanded by market. Say's law could be seen in circular flow of economy assuming that firms distribute all it's profit to households.

CNBC economist Larry Kudlow says " It is buisness not consumers that is the heart of the economy. When buisness produces profitability, they create incoming paying jobs and consumer spent. Profitable firms purchase new equipments to modernize and update their structures and softwares."

Taking the example of Seattle, Seattle didn't become rich because the consumer started to demand more but creative buisness such as boeing, microsoft, starbucks and Amazon came up with new products and services. Consumers didn't demand for such products but when created added to the enomic develoment.

Critisism of Say's law

• The mass unemployment and prolonged recession of the 1930s proved production doesn't create demand. In an recession there could be aggregate demand for goods produced.
• Prices and wages of workers are not flexible.
• Excessive saving and not spending.
• Liquidity trap
• The balance sheet recession of 2008-2012 showed that banks, firms and household were keen to pay back their debt but not spend.

Explaining Keynesian theory

John Maryanrd Keynes wrote " General Theory of Employment, Interest and Money" in 1935. Following Keyne's model a nation benefits in many spheres - increased employment, stable banking industry and tools to monitor country's econmic output. Keynes believed that government should manage consumer demand through policy and taxation thereby reducing inflation and unemployment, the results of too little and too much demand respectively.

Pros of Keynes model

• Increased employment : During recession gov may direct companies to rehire and invest in them to help them.
• Stablization of banking industry
• Tighter control on government spending
• Tools to monitor economic output
• Moderation of interest rates

Example of China in using Keysian model could be seen in miraculously improving its economic structure and continuously using government fiscal spending to stimulate the economy snd advert the ill effects of the world experiencing from the fall out of 2008 Great Recession.

Cons of Keynisian Model

• It sees entire economy from demand side completely ignoring supply side.
• No real economic system fits its model completely.
• If controlled completely by government it would lead to curbing freedom of choice of consumers.

India, my country is a land of diverse customs and culture, of rich and poor. It's not very easy for it to stick to one strict economic model for its economic development. All major political parties here either Indian National Congress or Bhatiya Janta Party believes in hands on approach. India has "mixed economic model".

As per my understanding supporting or opposing any of the theories completely would not be right. For a country like India where there is higher rate of unemployment and poor people, just creating supply would not fulfill the purpose. Who would use microsoft or eat and drink in starbucks or kfc unless there is money in hand. So here the main aim should be first to improve the conditions of people which cold be done only by government, following Keynisian model lifestyle and living conditions of people could be improved and then only Say's ecomomic model ie. supply creating demand could be a success only if people have enough ecomomic capability to spend. Government of India during theis COVID-19 crisis introduced Atmanirbhat Bharat Abhiyan, making India self sufficient and also provided stitumus to many sectors.

Now it could be understood that there is no one economic model, either Says or Keynes or any other that could fit strictly worldwide. Each one of them has it's own pros and cons. And it's degree of applicability should be defined according to a country or region's local conitions, demographic dividend, geographical and political history.