ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Austerity or Fiscal Stimulus?

On Modern Macroeconomics and the Importance of Context

This comment is on the article “Strange Defeat” by J W Mason and Arjun Jayadev (EPW, 10 August 2013). Though in general, the paper rightly points out the similarities in the New Keynesian and New Classical macroeconomics and the prescriptions that follow from them concerning austerity vs fiscal stimulus, it fails to highlight the importance of context in resolution of such debates. According to me the austerity issue in the European Union (EU) has to be treated differently from that in the United States (US) and it is certainly different in countries like India. There is a good amount of literature in modern macroeconomics itself that provides justification for this approach.

Also, it should be noted that the tendency to immediately dismiss the idea of dynamic optimising agents as absurd, however tempting, only comes at the cost of clarity and rigour. If the plausibility of such assumptions is to be questioned, then why not question the analysis based simply on macroeconomic aggregates with no regard to the process of their emergence? I think, as a social scientist, one has to have some faith in people’s ability to make choices and that they have some agency. However, once we do that, policy prescriptions cannot be made without considering how people would react to it – a point, which simplistic analysis based on Hicks-Hansen IS-LM or AS-AD framework seems to so often miss.1

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