[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

THE INTERVENTIONIST PERSPECTIVE
The case for intervention is based on two key beliefs. First, economic fluctuations are
not simply the efficient response of the market to shifts in productivity, as the real
business cycle theorists argue. Instead, wages do not adjust quickly enough to maintain
a balance between labor supply and labor demand, and therefore declines in
aggregate expenditures lead to cyclical unemployment. Second, the period of excessive
unemployment can persist for a long time. In contrast, the underlying assumption
of the noninterventionists is that markets adjust quickly, making cyclical
unemployment a short-term affair at worst. While the process of wage and price
adjustment alone may eventually bring the economy back to full employment, interventionists
believe that this adjustment can be speeded up by appropriate policy
interventions. They believe that macroeconomic policies can help stabilize the
overall economy.
Today, the leading school of thought among economists who believe that government
can and should design policies to stabilize the economy is called New
Keynesianism. These economists share John Maynard Keynes’s view that unemployment
may be persistent and that though market forces may restore the economy to
full employment, these forces often work so slowly that government action is required.
The new Keynesian theorists differ from older Keynesian analysts in their emphasis
on microeconomics—for instance, like many real business cycle and new classical
economists, they believe that theories of aggregate behavior should be based
on theories of the individual households and firms that make up the economy—and
in their emphasis on the important role played by expectations about the future.
But they also have identified a variety of reasons, such as costs of adjustment and
imperfections of information, why markets do not adjust quickly to disturbances.
Because markets may be slow to adjust, macroeconomic policies may be needed to
help stabilize the economy in a timely fashion.
Wrap-Up
SCHOOLS OF THOUGHT ON
MACROECONOMIC POLICY
Noninterventionists
Real business cycle theorists believe fluctuations in economic activity are due to
external shocks and that markets respond quickly and efficiently. Government
intervention has no useful role to play.
New classical economists think that the scope for government intervention is limited
because wages and prices adjust quickly and because the private sector will
adjust in anticipation of policies in ways that offset the impacts of the policies.
Others believe that even though markets adjust slowly, discretionary macroeconomic
policies make matters worse rather than better because of the long and uncertain
lags in determining the need for policy actions, in implementing policy changes,
and in affecting the economy.
THE GOALS OF MACROECONOMIC POLICY ∂ 847