Munich Personal RePEc Archive

Neoclassical Versus Keynesian Approach to Public Policy – The Need for Synthesis

Khan, Mohd Saeed and Aziz, Ghazala (2011): Neoclassical Versus Keynesian Approach to Public Policy – The Need for Synthesis.

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Abstract

The global economic recession following the financial crises once again revived the debate over the efficacy of Keynesian solution to deal with the crises. Most of the country went in to offer bailout packages from the public budget which could be the reminiscent of such policies adopted earlier – New Deal of President Roosevelt of US is case in point. Keynes was the first person to provide theoretical justification for the deficits in public budget to raise the aggregate spending level in the economy which, in turn, would raise the employment level. Keynesian advocacy would have remained unheeded had the crises of 1930s not occurred. The crises offered the opportunity to put the Keynesian solution to test. The approached worked. But by the end of the decade of 70s this approach was abandoned and neoclassicism not only resurfaced but became the bases for the policy not only for nations but for multilateral financial institutions as well. It was the crises again which brought back the Keynesian wisdom to relevance. The present paper assesses the two approaches in the historical context to find if synthesis between neoclassical and Keynesian approach is possible to make the public policy more effective.

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