John Keynes, a reknown economist, argued that recessions are caused by the reduction of consumer demand within the economy. In his calssical understanding of recession John keynes believed that there was no way that prices and wages that are presented to labourers could be slashed in order to be able to help a given economy to be in a position to bounce back froma recession( Carbaugh 288). Keynes understanding of a recession was driven by the idea that because every participant within the economy hurts during a recession, it is not worthwhile to introduce a collective measure that would create more strain to the peiople who are already participating to the wellbeing of the economy. This means that the reduction of prices on given goods would not be a good way to be able to correct an ailing economy. This is because the prices are shaped by both the cost of production incurred by the producers and the deamnd that these goods are able to obtain within the market. This means that the reduction of prices of particular goods and services at a time when there is a recession would affect producers negatively because they would not be in a position to regain the amount of money that goes to the production process.
It is also essential to realize that in the cas of a recession, the purchasing power of the consumers tends to go down. This means that consumers tend to cut back on the quanity of products that they purchase from the market. This would mean that a corrective measure of either increasing taxes or directly reducing the wages that they receive would create a situation whereby their already low purchasing power would even detereriorate. In order to ensure that recessions do not bring economies to a stand still, Keynes believed that government as an entity has the ability to be able to seal the deficit within the economy that is created by a recession. Keynes prescribes that governments pump more money into their economies so that even though their respctive economies are ailing, people are constantly employed and other key facets of the economy continue to function as normal.
However, it is important to realize that governments tend not to have their own money. This means that governments have to find alternative ways of being able to secure extra money to be able to pump into their ailing economies. Some of the sources of these extra finances includes loans from other nations and also taking financial assiatance from monetary institutions like the International Monetary Fund and the World Bank(Keynes 112). Though Keyne saw this as a remedy for recessions, it is important to note that borroeing of money by ailing nations inorder to save their economies does not necessarily solve the problems that are at stake. This is because the loans and other finances that are borrowed from other institution have to be refurnished. This means that though pumping of finances in the economy keeps the economy afloat, economies might not be growing first enough to be able to allow governments to refunish their debts. This means that at the end of it all, the domestic participants that governments initailly seek to protect from the effectes of the recession will end up repaying these debts through mecahnisms created by governments like increased taxes or the reduction of minimum wages.
Works Cited
Carbaugh, Robert. Contemporary Economics: An Applications Approach. New York:
M.E. Sharpe.Inc, 2010. Print.
Keynes, John Maynard. The General Theory of Employment, Interest and Money. New
Delhi: Atlantic Publishers, 2006. Print.
