Question

Read Keynes quote on page 448 in 20-5b about how, ". . .in the long run, we are all dead." Explain to me in your own words what you think this means in terms of whether or not we should intervene to put people back to work in a recession or wait for the economy to fix itself. How does this relate to our current recession caused by the Corona virus

Answer 1

During any economic crisis, the government has two options:

- the first one is to do nothing and allow the economy to restore itself

- the second one is to actively intervene and bring back the economy on track

----

Classical economists had great faith in the self restoring powers of the economy, and hence used to advocate minimum intervention. The economy was assumed to come back to equilibrium in the "long run".

The main problem with this approach is that no one has seen the long run, and the long run generally means a few hundred years.

Keynes argued that we will all be dead by then, anyway. He said that waiting for long run adjustments to take place, is very misleading. As per Keynes, if economists are taking this approach, they have set a "useless" task for themselves. If they allow for an economic crisis to cause short term damage, and justify the damage by saying that things will improve in the long run, this is a wrong approach.

Keynes advocated active fiscal policy intervention.

--

The current crisis caused by the corona virus is an example of such a big crisis that can damage the economy in the short run, and maybe even in the long run.

If no intervention takes place, and we wait for things to happen, too much damage will be caused to the economy.

Most countries throughout the world realize this, and have already announced massive fiscal and monetary packages. Thus in a way, the world has responded as per the Keynesian approach.