Keynesian economics

Apropos 'Year 2011 doesn't look very promising' carried by Business Recorder on Monday, Keynesian economics is demand-side economics. It addresses the issue of policy response to business cycles, which are demand-driven. Keynesian economists believe that the short-run aggregate supply curve in a typical economy is upward sloping, ie any increase in aggregate demand leads to both an increase in the price level and an increase in the output (GDP).
However, the slope of the short-run aggregate supply curve depends on the productive capacity of the economy. If the economy is operating at or near full capacity, the aggregate supply curve is almost vertical, meaning that any increase in aggregate demand leads mostly to an increase in the price level rather than the output. On the other hand, if the economy is operating below its full capacity (a phenomenon referred to as 'economic slack'), then the aggregate supply curve is relatively flatter, and increases in aggregate demand translate into increasing output with relatively constant price level.
This Keynesian model of aggregate supply and aggregate demand implies a 'counter-cyclical' approach to fiscal and monetary policies. In the case of an economic boom, when the economy is operating at full capacity, Keynesians prescribe contractionary fiscal and monetary policies in order to curtail aggregate demand and contain the inflationary pressures.
In the case of an economic recession, on the other hand, when there is excess capacity and slack in the economy, Keynesians advocate expansionary fiscal and monetary policies in order to stimulate aggregate demand and output growth. However, this counter-cyclical approach works only in the case of demand-driven booms and recessions where there is no trade-off between inflation and growth.
Examples of demand-driven recessions include the Great Depression of the 1930s and the recent financial crisis in the West. The recent economic slowdown in Pakistan, however, is NOT an example of demand-driven recessions. The economy of Pakistan has been exhibiting a pattern known as 'stagflation' which means that it is showing high inflation as well as economic stagnation.
This situation implies that there is a clear trade-off between inflation and growth which precludes the use of counter-cyclical policies. If the authorities adopt expansionary fiscal and monetary policy stances to stimulate growth, the result will be an inflationary spiral. On the other hand, if the authorities adopt contractionary policies to contain inflation, the result will be stunted growth.
The cause of the recent economic plight of Pakistan lies in supply-side and structural issues, such as the rapidly deteriorating law and order situation, institutional inefficiencies and rapidly fluctuating commodity prices in the international markets. Therefore, the Keynesian prescription of counter-cyclical policies is completely irrelevant in the case of Pakistan.