Introduction
Macroeconomic stabilisation refers to measures taken to reduce fluctuations in economic growth, employment and inflation. The Keynesian and orthodox approaches differ mainly in their understanding of market adjustment and the role of government.
Body
Difference between Keynesian and Orthodox Approaches
| Basis | Keynesian Approach | Orthodox Approach |
|---|---|---|
| Role of demand | Aggregate demand drives output and employment, especially during recessions. | Demand affects short-term fluctuations, while long-term growth depends mainly on supply-side factors. |
| Market adjustment | Markets may not automatically achieve full employment. | Markets tend to move towards equilibrium through price adjustments. |
| Role of government | Active intervention is necessary to stabilise the economy. | Limited intervention is preferred, with greater reliance on market forces. |
| Fiscal policy | Higher public spending and investment can revive demand and create jobs. | Fiscal intervention is considered less necessary; excessive spending may create inflationary pressures. |
| Monetary policy | Supports economic recovery, but may be insufficient when private investment is weak. | Primarily focuses on controlling inflation and stabilising the economy through interest rates. |
Policy Implications
- Keynesian approach: During a recession, the government can increase infrastructure spending and employment programmes to boost aggregate demand.
- Orthodox approach: Monetary policy, price stability and market adjustment are emphasised, with intervention aimed at addressing short-term rigidities and economic shocks.
- The orthodox approach includes different schools of thought, such as monetarism, new classical economics and New Keynesian economics; therefore, it does not imply that all orthodox economists reject government intervention.
- “India’s recent macroeconomic policy illustrates these approaches in practice. The Centre’s capital expenditure allocation rose to ₹11.21 lakh crore in FY 2025–26, reflecting the use of public investment to support growth. Meanwhile, the RBI’s cumulative 125-basis-point repo rate reduction from February 2025 illustrates the use of monetary policy to support economic activity as inflation moderated.”
Conclusion
Both approaches seek macroeconomic stability but differ in their emphasis. A balanced policy framework combining demand management during downturns with price stability, productivity growth and fiscal sustainability over the long term is the pragmatic way.
