In mature economics and democracies, economists and policy makers are often locked in debates whether government should intervene to stabilize an economy.

Macroeconomic phenomena such as employment prices and growth seldom remain at the same level for a long time. There are times when prices throughout the economy rise at an imperceptible rate and then suddenly they rise continuously throughout the economy. We experience inflation. This inflation in the past used to go hand in hand with higher levels of employment. Not necessarily so these days, with the advent of the phenomenon called stagflation.

Should government intervene to keep fluctuations of employment and prices within reasonable bounds? If so, using what instrument?

Apart from direct commands, the government uses monetary and fiscal policies to influence the tempo of the economy. Monetary policies are conducted by the central bank which raises or lowers interest rates to increase or reduces the amount of money circulating in the economy and may use direct instructions concerning credit.

Views in favour of intervention. Left to their own, economies fluctuate too much. For some socio-psychological reasons firms and households may develop pessimism about the future and start cutting their expenditures, firms may reduce expenditure on stock, while households may be saving rather than spending their earnings. These actions will reduce the aggregate demand for goods and service.

The decline in aggregate demand in turn leads to a fall in the production of goods and services, firms dismiss some of their workers and unemployment shoots up. Unemployed people do not have much money to spend on goods and services. Therefore, the aggregate demand in the economy tumbles. You then have recession. If the government does not intervene the recession may degenerate to s depression.

In a democratic country a government that is indifferent to the people’s plight during busts (recessions) is likely to lose during the next elections. Thanks to the Bloomsbury and Cambridge genius, John Maynard Keynes when aggregate demand is too inadequate to ensure full employment, policymakers should expand government expenditure and reduce taxes as well as expend the money supply. This action will result in revival of the economy new jobs will be created as firms reopen their factories.

The problem may not be inadequate but excessive demand in the economy which gives rise to galloping inflation. People all round may be experiencing rising prices as is the case at present in Malawi. To combat inflation, policy makers should cut government spending raise taxes and reduce the money supply.

In macroeconomic theory, such a policy gives the country a stable economy. But there are side effects which compel some economists to advocate the policy of hands off.

They say that monetary and fiscal policies do not affect the economy immediately , usually there is a time lag between launching the policies and seeing the effects.

Monetary policy affects aggregate demands through changes in interest rates.

When central bank raises the basic interest rate firms and households are expected to borrow less from commercial banks. But many households and firms plan their expenditure patterns well in advance. Because of this, it takes time for change in interest rates to alter the aggregate demand for goods and services.

Fiscal policy also operates with a lag especially in a democratic society where you have ruling parties and opposition parties locked in lengthy debates in parliament to pass budget bills. When taxes are raised there is a lag between the passing of the bill and the collection of the taxes.

Those opposed to government intervention in the economy cite examples when monetary or fiscal policies have achieved the opposite of what was intended. They say the best thing is to do no harm as students who are being trained as doctors are usually advised by their professors. These students are reminded that the human body has natural restorative powers. When confronted with a patient whose sickness cannot be diagnosed, a doctor should not treat him/her with drugs whose efficacy is uncertain. Rather, wait for the natural cures to restore the patients’ health.

One reason economists and policy makers fail to settle for a unanimous policy is their background some dislike unemployment more than they dislike inflation. When the bank raises its basic rate, to discourage borrowing and the government cuts expenditure, production and employment in the economy fall.

Those who would tolerate inflation but not growing unemployment prefer to keep interest rates low in order for commercial firms to borrow more working capital and production capacity.