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.If the government finances its expen-ditures by borrowing, the results will not be different than if it raises currenttaxes instead.Knowing that future taxes will have to rise to reimburse the newdebt created by the deficit, people will adjust their behavior accordingly.Theywill save more to pay future taxes, or leave more money to their heirs; one wayor another, they will consume less now, exactly what they would have done ifcurrent taxes had been raised.Not only the deficit is not transferred to futuregenerations, but it can’t stimulate the economy, even in a Keynesian perspec-tive, since it reduces consumption.What the government spends, individualsveconnect.com - licensed to ETH Zuericdon’t spend.This confirms the vacuity of stimulus expenditures to counter arecession.palgraA combination of Keynes’s aggregate demand apparatus and classical mar-ket adjustments, the new classical school seemed incapable of explainingom wwwrecessions.By the 1980s, a new paradigm was in the works with the RealBusiness Cycle (RBC) school.RBC theorists include Fynn Kydland, EdwardPrescott, Robert Barro, and others.These economists built on the new classi-cal model, but disregarded aggregate demand and focussed on supply shocksyright material frcaused by technological advances.In their view, the business cycle is an adap-Coptation to real disturbances on the supply side.Money plays no role in pureRBC models.“While recessions are not desired by economic agents,” writeBrian Snowdon and Howard Vane to explain RBC theory, “they representthe aggregate outcome of responses to unavoidable shifts in the constraintsthat agents face.”66 The business cycle, which can be seen as a consequence ofSchumpeterian creative destruction and the adaptation of individuals to suchshocks, is very closely related to long-run growth.In fact, the distinction10.1057/9780230118478 - Somebody in Charge, Pierre LemieuxFebruary 4, 201119:27MAC-US/CHARGEPage-619780230112698_04_ch0262●Somebody in Chargebetween the short run and the long run is abandoned.The business cyclecomes from frequent and random technological shocks, which leads GDP tofluctuate around its trend.So there is really no regular cycle, but a series ofadjustments and equilibriums following supply shocks.Besides technology,other sorts of supply-side shocks can fuel disturbances and adjustments, likenatural disasters, war and political upheaval, government regulations, or rapidchanges in the price of energy.This suggests that the doubling of the price ofoil between 2006 and 2008 might have contributed to the crisis along withthe other factors I will analyze later in this book.Snowdon and Vane note that “real business cycle theorists have challengedthe conventional wisdom and forced theorists of all sides to recognize justhow deficient our knowledge is of business cycle phenomena.”67 These the-ories have had a major impact on macroeconomic theorizing.Kydland andveConnect - 2011-04-01Prescott received the 2004 Nobel Prize in economics “for their fundamentalcontributions to.the design of macroeconomic policy.[and] how varia-algrations in technological development—the main source of long-run economich - Pgrowth—can lead to short-run fluctuations.”68Other schools of economics have contradicted or supported Keynes.TheNew Keynesian economists, perhaps best represented by Gregory Mankiw,tried to answer some of the challenges raised by Keynes’s critics by empha-sizing market imperfections and the non-neutrality of money.With themonetarists and against the Keynesians, they argued that money matters.In the process, the new Keynesians incorporated the ideas of many criticsof old Keynesian theory.“My own views,” says Mankiw, “emerged as muchfrom Milton Friedman as from John Maynard Keynes.”69 The New Politicalveconnect.com - licensed to ETH ZuericMacroeconomics, another recent school of macroeconomic thought, empha-sized the political factors in the choice of fiscal and monetary policies.The.palgraolder Austrian School, which was partly displaced by the Keynesian steam-roller, kept offering a radically different approach (which I will review inom wwwChapter 6).My rapid overview of macroeconomic theories suggests two conclusionsfor our purposes.First, it is not totally obvious that serious recessions wouldoccur without government intervention.At any rate, it must not simply beyright material frassumed.Second, the diversity of serious macroeconomic theories shows howCopuncertain is our knowledge of business cycle phenomena.Generations of bril-liant economists have tried to understand the business cycle, and still do notagree among themselves.How pretentious it is for parties of politicians orcommittees of bureaucrats to claim they know how to prevent or dampenrecessions!10.1057/9780230118478 - Somebody in Charge, Pierre LemieuxFebruary 4, 201119:27MAC-US/CHARGEPage-629780230112698_04_ch02CHAPTER 3The Car of CollectivismBut now that we know better, and perceive that the economic forces never have been,veConnect - 2011-04-01never can be, and never should be, left to themselves, and are seeking deliberatelyalgrato subdue individual action into harmony with collective purposes, the more clearlywe can detect the evils which accompany the strength of spontaneous organisation,h - Pthe more effectively we may hope to check them.The play of individual desiresproduces many results that outrage the general conscience, and, as we can control thelightning so soon as we understand it, we may hope, as we come better to understandthe economic forces, indefinitely to increase our control of them, till we can makethe ever-present vigilance of the individual’s desire to accomplish his own purposessubject to the control of public aims, and so harness individualism to the car ofcollectivism.— Philip Wicksteed1veconnect
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