Lecture 5

Public Procurement from a

Doctrinarian Perspective

The Big Question

Can the government
positively and efficiently
influence the economy during
a recession by using public
expenditures as an
instrument?

Two Major Doctrines

(Neo)Keynesianism interventionist
vs.

(Neo)Liberalism free
market

(Neo)Keynesianism
Named after British economist John
Maynard Keynes (1883 1946) whose
ideas were decisive in recovering after
the Great Depression.
Keynesianism underlines the strong
connection between aggregate
demand and economic output, with
further influence on employment.

Boosting Aggregate
Demand
Through Monetary Policy (interest
rates and more recently quantitative
easing)
Through Fiscal Policy engaging in
increased public spending even if this
means widening the budget deficit.

(Neo)Keynesianism and
Public Spending
Consequently, the
Government should increase
public spending during
recessions in order to boost
aggregate demand and
revigorate the economy.

(Neo)Keynesianism and
Public Spending (2)
Public spending should be oriented towards
projects that:
Create numerous jobs (directly or
indirectly)
Create demand for other goods/services
Sustain further development (egg.
infrastructure)

The Mechanism Phase I

Public spending increases

Budget deficit
increases

Aggregate Demand increases

Employment
increases

Economic Output increases

Inflation
increases

The Mechanism Phase II

Increased economic output

Inflation
decreases

Tax revenues
increase

Increased employment level

Social
Payments
decrease

Consumption
increases

The Mechanism Phase III

Public spending returns to normal levels
Increased
tax
revenues

Decreased
social
payments

Budget is rebalanced

Increased consumption

Economic output and

employment remain
increased

The economy is revigorated!

(Neo)Liberalism
Liberal ideas are set forth by Adam
Smith in his 1776 book The Wealth
of Nations
Beginning with the 60s and until the
recent economic crisis, neoliberal
ideas dominated the worlds
economic practice

(Neo)Liberalism (2)
Main points:
the market has the power to autoregulate and thus reach the best
economic outcome: the invisible hand
markets are efficient
government should not intervene in the
market
government regulation should be
minimal

(Neo)Liberalism and Public

Spending
Liberalism accepts the role of
monetary policy in boosting
the economy but rejects
any government use of
fiscal policy for this
purpose!

(Neo)Liberalism and Public

Spending (2)
Motivation:
Government spending increases both short
run consumption (+ for demand) and the
interest rate (- for demand), resulting in a
null effect on total demand game.
Government spending will cause inflation
and only a temporary increase in
employment.
Traditional monetary policy and free market
mechanisms will deliver a superior outcome.

Theories in Practice
Both theories regarding the use of public
expenditures as a way to end recessions
have been:
enjoying practical success, even though
they have also been subject to failure;
supported by world-class economists;
criticized by other world-class
economists.

So

a personal belief needs

to be formed based on
own analysis, research
and experiences.

Just an Opinion
Neo-Keynesian mind sets make better
used of all available fiscal and monetary
instruments and, in an extremely
complex economical environments,
economic objectives can be reached just
by using the appropriate policy mix.
Fiscal Policy (and its public expenditure
component) CAN positively influence the
economy.