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Keynesianism, Monetarism and the shift of economic policy

Uploaded by Laurence Allen on Feb 05, 2002

Q1: How and why were Keynesian economic policies abandoned in the UK?

Keynesianism was the economic model followed by governments in the UK from the 1950s up until the late 1970s. In the 1950s and 1960s, the name “Butskellism” was given to Chancellor Butler and Chancellor Gaitskell’s Keynesian approach to management of the economy, with an overall aim of maintaining full employment by substantial government intervention.

Keynes rejected the idea of laissez faire (“leave alone”) policies that left the market to regulate wages and prices. He said that if the economy were left alone in this way, there would be a recession, meaning more people being laid-off from their jobs and reduced real wages. More unemployment would then result in less consumer confidence and hence a decrease in aggregate demand. Keynes also rejected the socialist idea of the economy being stimulated by the redistribution of wealth to the poor – this would destroy the incentive to achieve and so competition would fade, resulting in inferior total output and making recession much more likely. Governments used Keynes’ theory of “demand management” as a solution to recessions. He said that a government should “spend its way out” of a recession by lowering taxes and investing more in projects and programmes which would create new job opportunities and create wealth. Those who take up the jobs would have more money in their pockets and so their extra spending (increased demand) would stimulate the economy more. Keynes’ idea was that if demand was threatening to rise too much, the government should reduce the Budget deficit by raising taxes and cutting government expenditure to reduce demand. In the same way, if there was a substantial rise in unemployment, the government should increase the Budget deficit by investing in new projects and lowering taxes.

There was little criticism of Keynesianism until the late 1970s because the society as a whole was pretty wealthy. There was consistent full employment and great prosperity in the 1950s and 1960s. Earnings were growing faster than prices, meaning that real wages were high and more people were able to buy expensive durable goods such as televisions and cars. Taxes were also low, people had more money to spend and overall wealth was high. But by the mid-1970s, however, Keynesian policies did not seem able to prevent ‘stagflation’ (high inflation combined with high unemployment). The average rate of inflation between 1950 and 1970 was 4.5%...

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Uploaded by:   Laurence Allen

Date:   02/05/2002

Category:   Politics

Length:   10 pages (2,321 words)

Views:   2148

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