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Combination of Keynesian and Schumpeterian fiscal policies

Combination of Keynesian and Schumpeterian fiscal policies

Posted November. 16, 2018 07:48,   

Updated November. 16, 2018 07:48


The increase rate of the Korean government’s fiscal expenditures for next year is more than three times greater than the country’s projected economic growth rate. The National Assembly is busy pork-barreling more than 470 trillion won (approximately 417.4 billion U.S. dollars) in taxpayers’ money. It is a season when government officials and lawmakers review fiscal spending plans on behalf of taxpayers, but they are not entirely trustworthy. The spending of taxpayers’ money is relatively inefficient in nature. It is not because government officials and lawmakers lack the awareness of their responsibilities as public servants but because they have little motivation for struggling to identify true purposes and save money. To the eyes of proxies, government budgets are, after all, not their own money.

The story of a local government that made a giant but useless kettle with a view to put in on the Guinness World Records is still on everyone's lips. It is not hard to find similar recent cases. Many Koreans are angry about the government’s budget allocation to creating temporary jobs for turning off lights in empty university classrooms and controlling classroom temperatures. Taxpayers should question how their money is spent.

By now, two names come to mind: John Maynard Keynes and Joseph Schumpeter. The latter summarized the principle of capitalism’s economic growth with the term “creative destruction.” He argued that the capitalist system is embedded with an engine of endless metabolism that prompts innovative entrepreneurs to drive out old sectors of the economy with new products and business models. The economy stops growing without any innovation. If innovation breathes, the economy grows. The current Korean economy is in a situation where the internal engine for innovation is cooling down.

The super budget is undoubtedly a result of the Keynesian expansionary fiscal policy. If an economic depression is caused by a mid- to long-term lack of innovation, fiscal spending should be aimed at promoting entrepreneurs’ innovative attempts. Regulations that obstructs entrepreneurial challenges should be removed before spending money.

The Korean government should also get rid of its budget projects that replace the private sector’s roles. Numerous government agencies are providing corporate consulting with taxpayers’ money, discouraging the growth of the knowledge-based services industry. Some local governments have plunged into creating financial business platforms, leaving entrepreneurs in that area with nothing to do for their businesses.

On the contrary, there are areas where the government should spend more money to promote innovation – buying more goods and services created by businesses to innovate public services. The government should also pour more fiscal resources into making a safety net that would cushion the shocks for individuals and businesses losing out in the trend of creative innovation and help them shift their occupations.

Even if the government drastically increases budget according to Keynes’s advice, its spending plans should follow Schumpeter’s suggestion of contribution to entrepreneurial challenges as the standard. The keyword is an innovation-oriented fiscal policy. The current Korean economy should find an answer in both Keynes’s and Schumpeter’s arguments.