At the heart of Keynes's doctrine is the management of the business cycle - how to combat recession and ensure the maximum number of people who want to work can find work. Once expanded, this idea became the primary target of the economic policymaking process. Unlike other doctrines of the early 20th century, Keynesianism shows that the state plays a great role in achieving its goal.

The Great Depression further persuaded supporters of this doctrine that the economy could not self-correct. Governments should spend more than they collect taxes, endure large budget deficits during a recession to support the economy, and then pay back when the economy gets better.

By the 1970s the pillars of this doctrine had collapsed. Deflation with high rates of inflation and persistent unemployment makes economists who still think that these two variables are always fluctuating in the opposite direction. One of the arguments that Friedman most harshly criticized Keynes's doctrine is that if policymakers try to stimulate without addressing weaknesses deep in economic structure, they will drive inflation skyrocketing without reducing the unemployment rate.

So the policymakers were looking for something new. Monetarist ideas in the 1980s prompted Paul Volcker - who was then chairman of the US Federal Reserve - to fight inflation by reducing the money supply, although doing so also created A recession caused by an increase in the unemployment rate but was expected.

Many monetarists argue that policymakers have focused too much on income and wealth equality, leading to reduced economic performance. Instead, they should focus on the basics - low and steady inflation, for example, factors in the long term that will improve their quality of life.

In the 1990s and 2000s, a new school emerged, a cross between Keynesianism and monetarism. The core idea is "flexible inflation target". The central goal of macroeconomic policy is to keep inflation low and stable, although sometimes (especially during a recession) it is possible to set employment goals first, accept inflation. At a high level.

The most important tool to run the economy is short-term interest rate adjustment because interest rates affect consumption and direct investment more and more than the money supply. The independence of the central banks ensures that they will not fall into the inflation trap, as Friedman warned.

Besides, fiscal policy - which is a way to manage the business cycle - is underestimated in part because it is perceived as vulnerable to politics. The job of fiscal policy is to keep public debt low and redistribute income as desired by politicians.


In this particular current context, this doctrine is being challenged. In fact, it was shaken for the first time since the 2008 financial crisis, when policymakers faced two major problems. The first is that the demand forces of the economy have been greatly reduced due to the crisis. To fight the recession, central NHTW massively cut interest rates and launched quantitative easing packages (or printing money to buy bonds). But despite such an unusual monetary policy, the global economy recovered very slowly with weak GDP growth. Finally, the labor market may explode, but inflation remains sluggish. In the late 2010s, the unemployment rate and inflation again did not turn out as expected but was too low, not too high as in the 1970s.

This phenomenon raises questions about how the economy should be run. Central NHTW faces a special situation: negative interest rates - which in common sense will cause customers to withdraw money and "keep under the pillow" at the same time. Quantitative easing packages are too new and their effectiveness remains controversial. The emerging issues make people rethink macro policy.

The post-financial crisis period also revealed uncertainties in income distribution. While concerns about the false pay for globalization and automation have strengthened populism in politics, economists focus more on the rich and poor gap, the monopoly. The number of businesses with too much power or a decline in social mobility. Central NHTW was accused of exacerbating the rich-poor gap as low-interest rates and QE packages sent home and stock prices soared.

However, as time goes on, the answer to the question of how much benefits economic stimulus can bring to the poor becomes clearer, if the unemployment rate drops sharply enough for the wages of the poor low-income groups increased. Just before the pandemic, Fed Chairman Jerome Powell proudly said that "this recovery will benefit the lowest income people most in recent decades".


But then a pandemic struck. Supply chain and production are disrupted - which would have had more of an impact on supply. But in the end, Covid-19 had more of an effect on the demand side, causing expectations for inflation and interest rates to fall even further. Investment demand plummeted, while people in rich countries save more.

Pandemic also exposes and aggravates disparities in the economic system. The "white collar" jobs may work from home but the lower group of skilled workers - deliverers, cleaning workers, waiters - are unable to do so and get reduced wages, fired, thus becoming a more affected group.

Even before Covid-19, policymakers began to focus once more on the phenomenon of the business cycle affecting the poor rather than the rich. However, as the economy fell into crisis and the poorest also suffered the most damage, the problem became even more urgent. And that also shifts the macroeconomic focus. Finding new ways to reach full employment once again becomes a top priority for economists.