Aspects of the Theory of Fiscal Policy

  • Maurice Peston

Abstract

The purpose of this chapter is to re-examine the standard theory of fiscal policy with a view to seeing where we are at the present time. It is apparent that much of the theoretical literature contradicts certain widely accepted beliefs, held more, perhaps, by market practitioners than by professional economists. It is also the case that existing theory has certain limitations which have not been at all easy to overcome. In particular, it is nearly as true as it was fifty years ago that except in very simple cases it has not been possible to incorporate stock theories and flow theories within a unified framework.

Keywords

Depression Income Librium 

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Notes

  1. 2.
    J. J. Keynes. Collected Writings, D. Moggridge (ed.), vols ix, xn. See also A. C. Pigou, The Theory of Unemployment (1933), p. 213. Reference may also be made to Keynes’s ‘Open Letter’ to the New York Times, 1953.Google Scholar
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    The idea underlying this is that a condition for a desirable expansion of employment and output may be a fall in the money wage paid by the employer. If the money wage received by the employee cannot fall, a reduction in employment taxes or an increase in wage subsidies are called for. Of course, more sensible still would be a rise in the money supply. An important early contribution was N. Kaldor, ‘Wage Subsidies as a Remedy for Unemployment’, JPE, December 1936.Google Scholar
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    S. Slichter. ‘The Economics of Public Works’, AER, November 1934. J. M. Keynes, How to Pay for the War, Collected Writings, vol. ix.Google Scholar
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    E. Cary Brown, ‘Fiscal Policy in the Thirties: An Appraisal’, AER, 1956.Google Scholar
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    E. Lindahl, Penningpolitikens Medel (1930). What the General Theory did provide was the concept of aggregate demand without which none of the relevant interventions can be analysed sensibly.Google Scholar
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    M. Friedman, ‘The Effects of a Full Employment Policy on Economic Stability’, in Essays in Positive Economics (1953). Both of these papers emphasised how policy intervention (fiscal or monetary) could be destabilising if time lags or the magnitude of shocks were miscalculated. It is also recognised now that the source of the shocks is of great significance.Google Scholar
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    M. H. Peston, Theory of Macroeconomic Policy. 2nd edn (1982), ch. 8 (London: Philip Allan).Google Scholar
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    M. Friedman, Unemployment Versus Inflation, IEA Occasional Paper 44 (1975).Google Scholar
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    M. H. Peston, Whatever Happened to Macroeconomics (1980), ch. n[(Manchester: University Press).Google Scholar
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    M. H. Peston, ‘The Efficacy of Macroeconomic Policy’, in Public Choice, Public Finance, and Public Policy, D. Greenaway and G. Shaw (eds) (1985) ( Oxford: Blackwell).Google Scholar

Copyright information

© National Economic Development Office 1988

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  • Maurice Peston

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