Abstract
Structural changes in the modern economy have diminished the impact of traditional monetary and fiscal policies. For the past 90 years, the field of depression economics has been dominated by the Keynesian school of thought, which advocated the judicious use of monetary and fiscal policies by governments to artificially create aggregate demand to bring the economy roaring back from a recession. Today, economies are more diversified entities and large sections of these economies cannot be stimulated by monetary and fiscal policies. This paper discusses future of fiscal and monetary policy in an age of rapid technological change. The current scenario calls for the reintroduction of the Austrian School to the mainstream thought process for effectively managing future business cycles.
Highlights
Keynesian economics, which was the driving force for understanding depression economics since the 1930s, advocated the loosening of monetary policy by central banks and fiscal policy by governments to weather economic storms
Proponents of Keynesian policies relied on making capital investments as they were looking for a spurt in construction and manufacturing sectors to boost the economy from a depression
America emerged from the Great Depression of 1929 only after the war effort and later with the establishment of the interstate highway system and other large capital projects fueled the recovery of the economy
Summary
Keynesian economics, which was the driving force for understanding depression economics since the 1930s, advocated the loosening of monetary policy by central banks and fiscal policy by governments to weather economic storms. Proponents of Keynesian policies relied on making capital investments as they were looking for a spurt in construction and manufacturing sectors to boost the economy from a depression. We see a steady decline in the manufacturing and production industries as a percentage of their contribution to the overall economic output. This is in some part because of the emergence of other sectors which have begun taking a greater share of the economic output. Short-term growth has historically been mainly influenced by governments through their monetary policy. Using fiscal and monetary policies to stimulate the economy in the short term will not have the same influence it once had since modern economies are structurally reoriented away from manufacturing and construction sectors. There has been an exponential increase in the productivity gains in the economy, which can be attributed to two things - humans were embracing the computing power more readily than ever and human capacities were being augmented with the aid of computers
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