chapter  Chapter 4
25 Pages

The Political Economy of Keynes, Schumpeter, and the Supply-Siders

WithBruno S. Sergi

The combination of a pragmatic political economy and recovery may induce further improvements for both because the former boosts supply and various other sources of investment and the latter brings about enhanced credibility. Many Western observers trusted that convergence on pretransition Gross domestic product levels was a meaningful indicator of medium-term success of economic transformation in centrally planned economies. The pure Keynesian model may at best promote brief economic growth along with inflationary risks because transition labor markets differ from the pure Keynesian model. A central purpose of policymaking is to create a multiple-goal economic policy and to encourage investment. In the Keynesian model, deficit spending becomes the only policy prescription when the economy falls into an equilibrium of unemployment. This is in contrast to the disequilibrium unemployment of classical economists, where real wages fall quickly in order to restore full employment.