Question

5. A major debate among macroeconomists is whether the economy is self-regulating.

a. Why do economists mean when they say that the economy is self-regulating?

b. Why do some economists believe in active intervention in the macroeconomy, whereas others believe in laissez-faire?

c.Why did the Great Depression lend credence to the belief that the economy is not self-regulating?

Answer 1

Self regulating economy means that the economy will correct anomalies in it by itself. It argues that no intervention is required on the part of the authorities to correct business cycles like recessions or depressions.

There is a split between economists ideologically whether the economy can be self regulating or not. Classical economists believe that the market clears itself in microeconomics and since macroeconomics is just an aggregation, markets dhosho clear at the larger level too. Other economists, led by Keynesians, argue that markets are insufficient in course correcting and government intervention is required.

During the Great Depression, the economy was at a very low position. The output had stumbled and hence unemployment was at an all time high. Due to unemployment, people did t have money to spend and hence demand was low, further reducing employment. The economy was stuck in a loop and was unable to come out of it. An intervention on the part of the government, by way of public soenspen to generate demand was required to pull it out of the loop. This episode shook the foundation of macroeconomic thought and catapulted Keynesian economics to the mainstream