Macroeconomic Policy of a Country

This article provides comments on macroeconomic policy of a country.

The time has come to ask whether or not we have been expecting too much of the traditional macroeconomic monetary and fiscal policies.

They have been criticized on the ground that either they do not work effectively or must be pushed to great length to work at all.

As such, other forms of macroeconomic policy measures should be given more attention and should be used more extensively. Anti-trust policies, for instance, can be used with greater vigor to remove centres of market power.

Market power allowed to grow unchecked will severely reduce the efficacy of monetary and fiscal policies because economic units insulate themselves from both the regulations of the market mechanism and the influence of government actions. It must be granted that there is greater scope for anti-trust policies than has been the case in the past.

Besides, another tool of macroeconomic policy that could be used more wisely is the concentration of government expenditures in areas where they will have the most favourable impact. Public expenditures could be undertaken with a view to helping regions of the country that are facing the worst economic distress—much like the emergency programmes. Lot could be done to facilitate regional economic growth and development by deliberate planning and pump priming expenditure as the economic situation warrants.

Other kinds of programmes could be undertaken to replace the defence expenditure if they decline. Revenue sharing, extension services, guaranteed incomes, health plans, recreational developments, government as the employer of last resort, labour exchanges—all could be utilized to boost demand and dampen the business cycle, thereby reducing the need for fiscal and monetary actions.

Similarly, tax structure could be revised to abolish the tax concessions or shelters used by some industries and individuals because these concessions represent nothing more than the backdoor spending—the granting of subsidies to various groups. Yet it is not clear how these actions will necessarily improve the working of macroeconomic policy for generating full employment and growth. In short, these measures and some other proposals to make the economy run more smoothly would, no doubt, be useful and desirable.

They have much to commend them on moral and social grounds as well, but the question here is whether or not they will improve upon the operation of the traditional measures used in the manipulation of the economy. The question remains an open one, for evidence is lacking either way. All that can be assumed is that such additional measures or changes would result only in marginal improvements in the conduct of ordinary macroeconomic monetary and fiscal policies.

There is a kind of spectrum of criticism going on from slight modifications to complete rejection of macroeconomic analysis and policy. This spectrum is broken up into three stages : first stage involve a severe criticism of Keynesian economics from the conservative viewpoint; the second stage represents a viewpoint of those who take a liberal (middle of the path) position; and the third stage involves an analysis from the left representing a form of complete rejection.

Milton Friedman and his associates severely criticize the Keynesian model. Heller, Okun, Tobin, Samuelson, etc., are all representatives of the middle position. Moving further to the left, one finds economists who are critical of macroeconomic (and microeconomic) theory or policies or both included amongst these economists are Kenneth Boulding, Robert, Heilbronner, Joan Robinson, Gunnar Myrdal, and perhaps the best known, John Kennet, Galbraith.

Galbraith’s main contribution can be found in his three most widely acclaimed books, though his ideas overlap. Throughout his work, Galbraith stresses the importance of the giant corporation in the modern economy, particularly the large corporation. With large size came power and Galbraith shows how the exercise of this power affects the economic system.

He finds the traditional analysis of firms behaviour to be inapplicable to the most important segment of the economy, that dominated by large-scale corporations. Indeed, most of microeconomic theory is rejected as obsolete.

One major idea that dominates his work is that the market system is no longer reliable as the means of allocating resources rationally, that is, the relation between individual wants and the production to satisfy those wants has broken down, the whole process having been reversed. Production comes first, and the individual is goaded to possess the products through advertisements.

The system is basically irrational which results in the over-production of private goods and under-production of public goods. Modern technology requires size power and control. As a result, control over the large corporations has shifted to organized intelligence the technocrats, the salesmen, engineers, production managers, marketing experts and all others whose skills a large corporation can assemble under one roof.

The owners and even the directors of the corporation are forced to relinquish control by the highly technical nature of the firm’s operations. Gone too is the simple assumption that firms maximize profits; since these profits do not accrue to managers, new goals have become more important. The new goals are autonomy and survival of the firm, sufficient growth to satisfy all concerned, and the freedom and ability to make use of changing technology.

To meet these goals and to plan adequately requires power, and that is what the giant corporation must have. The large corporation has insulated itself from government control as well, and in fact has manipulated government to the point where the state acts on behalf of it. Anti-trust laws do not work or are inapplicable to these industrial giants. Monetary income and fiscal macro policies then become handmaidens of the private planners in large corporations. Under the circumstances, there is private planning and not state planning!

Galbraith was further supported by P.A. Baran and P.M. Sweezy in their work ‘Monopoly Capital’, though there are differences in their approaches. Their models reject large portions of traditional microeconomic theory and substitute models in which the giant corporation dominates the economic system, sets the tone for the entire society and the set up within which it operates is overwhelmed and everyone and everything is subject to its influence.

Clearly, it gives a setback to traditional macroeconomic monetary and fiscal policies—the state’s actions—are seen to benefit the industrial system, in fact the state becomes subservient to the needs of these giant corporations; it becomes difficult to tell where the public sector ends and the private sector begins—they seem to merge. Keeping employment and aggregate demand high helps society but helps even more the giant corporations that dominate it.

In brief, all the national, international, monetary and fiscal macroeconomic methods to promote full employment and stability become ineffective before the new industrial state, the new alliance of government and big business.

They discard the old rationale for monetary and fiscal policies and calls for a re-examination of the location of power in the economic system. Monetary and fiscal policies—macroeconomic policies in general—will have to be re-examined to determine their effects on the economic system and its structure and to re-evaluate the benefits received by sectors, groups, industries, and so on, by the operations of such macroeconomic policies.