The Keynesian Economics

Introduction

The Keynesian state refers to the governing techniques of world capitalism, which operated in the 1960s. That was the time when great depression ended. During that time, the old techniques that were used to regulate the economy, such as the business cycle, were then replaced by new ones. Economic theory also changed because it was clear that markets will automatically bring the necessary adjustments, and it was then replaced by Keynesian economics (Coddington, 2013). The emphasis of Keynesian economics was the responsibilities that the state had in managing the economy. According to Keynesian economics, governments should increase their expenditures and reduce taxes to increase demand and pull out the global economy from the great depression (Farrell & Quiggin, 2017).

 The theory of Keynesian economics was developed by John Maynard Keynes in 1936. According to Keynes, demand is the driving factor that determines the levels of employment instead of supply, and that is why governments should intervene to alleviate the high rates of unemployment. His view was a replacement of the classical view of employment, which argued that free markets would establish full employment equilibrium without government interventions unless special conditions prevail (Chitty, 2014). In a free market, employees are willing to reduce their wage demands since some people are willing to work with low pay instead of being unemployed.

Keynesian economics focus on giving and explanation of why depressions and recessions occur then offers a policy prescription that reduces their effects. Keynesian state involved the post-war consensus, which led to increased welfare hence increased social protection of the people by the government.  However, the post-war consensus ended in 1979 with the emergence of Thatcherism (Farrell & Quiggin, 2017). The paper analyzes the post-war consensus, factors that led to the fall of post-war consensus and welfare state, and the type of consensus which replaced it.

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Post-war consensus

The idea of post-war consensus was developed by Paul Addison. It referred to the agreements among the political leaders and British people on their style of government and policies (Farrell & Quiggin, 2017). The consensus included the commitment to the welfare state where government plays a role in the promotion and protection of the social well being of the people and a belief in Keynesian economics, which encouraged more participation of government in the management of demand to create a balance between demand and output (Chitty, 2014).

 It started when Clement Atlee was elected as the British prime minister in 1945 and 1979 when Margaret Thatcher was elected.  A post-war consensus emerged because of the alignment of conservative governments and the labor governments.  Although they had differences in their ideological views on how to maintain British status after the end of world war II, political leaders accepted that their responsibilities was to manage the nation’s resources and achieve set goals instead of coming up with doctrinaire ideological policies (Harcourt & Kriesler, 2013).

The consensus covered the following areas welfare provision, social security, national health services, nationalization of public and industry utilities, and full employment. The main policy agreement between the two governments was people’s welfare and their protection (Chitty,  2014). Some of the policies passed in the parliament were the 1945 family allowance act, which provided money to the families who had children. The  1946 national insurance act for industrial injuries which provide money to support people who could not work after an injury and the education Act of 1944, which modernized and expanded the educational system among others  (Farrell & Quiggin, 2017).

Many historians and political thinkers have argued for and against the idea of the post-war consensus. Some who argued for consensus were Dutton, Addison and Kavanagh, and Moris (Harcourt & Kriesler, 2013). According to them, even though there was differences between political parties, they could be resolved within a framework of a common understanding of the government’s management of the economy. The framework contributed to the apparent continuities in policy until the 1970s. However, some like Ben Pimlott, a historian of the labor party, described consensus as a myth.   The critiques argued that the pillars that were used to justify the consensus are problematic because many public policies were not addressed; for example, crimes, punishments, and Private education were not addressed. According to the critics, also consensus is much influenced by party politics (Harcourt & Kriesler, 2013).

Factors that led to the fall of post-war consensus and welfare state

When World War II ended, Britain experienced difficult economic conditions because productivity reduced. There were high inflation rates, and its economy was way backward as compared to other Europeans countries (Farrell & Quiggin, 2017). It was further worsened by the post-war consensus, which comprised of full employment, the welfare state, increased roles of trade unions, and increased government intervention through comprehensive schooling and taxation. Margaret Thatcher broke the post-war consensus when she was as elected as the British prime minister in 1979 (Chitty, 2014).

However, the consensus had already weakened in the 1960s and 1970s, but there was still full employment, as stated by Keynesian. The economy was still mixed, and the unions had their power until 1979. Policies created by Thatcher changed everything marking a break from consensus. Thatcher policies of taxation, privatization, reduction of union powers, and minimal generosity welfare represented a clear break from post-war. (Chitty, 2014).

In the 1970s, Britain was experiencing economic decline. At that time, there were miner’s strikes against income policy, inflation, and rising living standards, and the party leaders competed trying to reverse the economic decline. The party’s governments turned to income policies to minimize inflation. They even tried to agree on the annual wage rises with the unions, but it was not easy since the unions were meant for collective bargaining (Chitty, 2014). The policy kept the prices for some time, but it collapsed because powerful unions broke the agreement. Other measures meant to increase economic growth and increase employment pulled extra imports hence worsening the economy and further increasing the inflation rates. The International Monetary Fund (IMF) came into rescue in 1976 and provided a loan to the British governments, and in return, they had to cut their spending. This happened when the unemployment rate was high hence bringing to end Keynesian economics (Harcourt & Kriesler, 2013).

The winter discontent in 1978 and 1979 destroyed the post-war consensus and discredited Keynesianism. Winter discontent was marked by a lot of strike by trade unions who wanted pay rise since there was pay caps of the labor party which was led by James Callaghan against trade union congress. This showed that the country was ungovernable, and it destroyed the government’s reputation for lack of ability to gain cooperation with its trade unions.

In the 1970s, the leader of the Chicago school of economics Milton Friedman preached monetarism, which was meant to discredit Keynesian economics. Keynesian was no longer seen as the solution to economic crises, and it attracted more considerable attention to Keynes critics (Farrell & Quiggin, 2017). Monetarism involves the control of money supply in the economy and, at the same time, giving a chance markets to fix themselves. Keynesian economics believes that an economy can improve if there is more demand. Monetarists economists believe that money is the only thing that controls the economy and controlling it will directly influence inflation. Since inflation was high in Britain in the 1970s, Milton Friedman argued that fighting inflation with money supply will influence interest rates in the future (Chitty, 2014).

Slow growth condition, which was referred to as stagflation, also led to the fall of the post-war consensus. Keynesian didn’t have appropriate policies that addressed stagflation (Stoker, 2006). Many economists used to believe that there was a relationship between unemployment and inflation until the 1970s. According to them, inflation was tolerable because it symbolizes economic growth. They believed that an increase in demand for goods and services increases the prices, which will, therefore, encourage the expansion of firms hence hiring more employees and generating more demand in the economy. However, when a period of stagflation started in the 1970s, it raised questions about the relationship between unemployment and inflation.  There were more critics to Keynesianism, and people started to lack confidence in it (Farrell & Quiggin, 2017).

 The oil crisis in 1973 also exerted pressure on post-war consensus.  The Arab members of the organization of petroleum exporting companies increased the prices of supply of oil and used it as a weapon against the western countries. The high prices and shortages of oil affected the economy of Britain, leading to an energy crisis (Harcourt & Kriesler, 2013). The government tried different measures to reduce the rate of oil usage such as rationing of petrol, minimal oil supplies to power stations, and reduction of speed limits. By the end of 1973, the government announced a state of emergency and opted for a three day week in some industries. By 1974 the rate of inflation had increased by 25 percent. The pressure was further increased by domestic problems, for example, the industrial strikes (Farrell & Quiggin, 2017).

State overload also caused the collapse of the post-war consensus.  There was an increase in the demand for the government and an imbalance between what the government could deliver, and the demand was created. This means if demand continues to increase, then it means more government intervention will be required hence generating more expectations (Stoker, 2006). 

Margaret Thatcher also reversed some policies of the post-war consensus; for instance, her housing act of 1980 allowed the residents to buy their flats. However, some elements of consensus were kept, such as nationalized health care (Harcourt & Kriesler, 2013). The post-war consensus was seen by those who were in the new right as being the cause of Britain’s economic decline, and they saw that their political beliefs was the solution to the problem.  When Margaret Thatcher was elected, the new right ideas was implemented, and it brought the consensus to its end (Farrell & Quiggin, 2017).

The ideology that replaced post-war consensus

Thatcherism replaced the post-war consensus. Thatcherism is a term that represents Margaret Thatcher’s policies as a British prime minister from 1979 to 1990 (Vinen, 2013). Thatcherism is a belief in small states and free markets.  It is the opposite of Keynesian theory because, according to Thatcherism, the government’s role is to control the currency, and everything else should be done by the individuals for them to practice their own choices and be responsible instead of depending on the government (Evans, 2013). 

Margaret Thatcher disliked any forces that were outside the parliament, which interfered with the functions of the government. For example, the trade unions, local authorities, and civil service were present due to the agreed consensus that the government should focus on full employment and intervene whenever this was threatened (Vinen, 2013).   In the consensus also, the governments owned certain products; for example, the communication, energy companies, and business community and trade unions were to be consulted in decision making (Allmendinger, 2019).

With low economic growth and inflation in the 1970s, the public supported Margaret Thatcher in making necessary changes. Thatcherism is the opposite of conservatism.  In conservatism, the government looks after the unfortunate and ensures that there is less gap between the poor and the rich. Thatcher forced people who still believed in conservatism out of government, and she became part of what was known as the new right (Allmendinger, 2019).

Thatcherism involved the political, economic, and social style of management. The economic policy addresses the systems of setting levels of money supply,  labor market,  taxation, state ownership, or any other interventions by the government to the economy. The social policy covers the welfare of the state. Political policy is associated with the general governance of the state (Vinen, 2013). 

Thatcher encouraged the De-nationalization and Free Enterprise, which is an economic policy. She changed the state-owned companies and products to private and oversaw the sale of businesses such as British steel, British gas, British telecom, and British Airways (Vinen, 2013). The reason of de-nationalization was for the state power to be reduced and increase people’s power.  When governments are involved, poor choices will be made because they are motivated by political pressures instead of sound business and economic sense.  For example, a government-owned company can employ many employees, which is inefficient, and it cannot get rid of them because of the negative publicity it might great. Private business was also believed to be efficient because the driven by the profit motive, and the shareholders pressure them to perform effectively (Allmendinger, 2019).

Thatcher also allowed the sale of houses owned by the governments to tenants. The policies changed the look of Britain to a more homeowner than council tenants and more shareholders than trade unionists. Because of Thatcher’s success in privatization, other countries such as Europe and Latin America adopted the idea since there was the poor performance of state-owned enterprises (Evans, 2013). 

Thatcher tackled the issue of high inflation and trade unionist experienced in the country. Inflation and trade union power was the main pillars of the post-war settlement. In the mid-1970s, inflation was about 25%. She solved the issue of inflation by declining the past interventionist economic policies and embracing the potential free markets (Allmendinger, 2019).  Thatcher followed a policy of monetarism, which is involved in the control of the money supply to control inflation. It involved high-interest rates and taxes. Taxes was raised, and her priority was the reduction of inflation rather than unemployment. According to her, employment was the responsibility of the employees and employers. Taxes was increased in consumer items such the gasoline, liquor, beers, and cigarettes. The total tax increased amounted to more than $6.6 billion in 1981, and by 1983 the inflation had reduced by 5%. However, the rate of unemployment and a deep recession increased to more than three million (Evans, 2013). 

Thatcher was also focused on minimizing the power of trade unions and put an end to the industrial disputes before it costs the British industry. In the 1970s, a lot of days was wasted because of the strikes of trade unions, and poor industrial relations was thought to be the main factor holding back the industry (Evans, 2013). The number of trade unions and days lost to strikes fell in the 1980s apart from the coal mine strike in 1984. Since then, there have been improved industrial relations. Thatcher also introduced compulsory ballots before strikes. Thatcher accomplished her goals; however, the rate of unemployment increased, which made her unpopular with the voters (Allmendinger, 2019).

Finally, in her aim to cut spending, Thatcher’s government announced plans of closing down the 20 coal pits in 1984, which led to the miner’s strike that ended in 1985 (Vinen, 2013). The strike was not successful in stopping the closures. So many pits were also closed, and coal mining ended in 1989 in the Kent Coalfield. According to her, the mines was not economical, and unions were preventing the development of new energy sources that were beneficial to the people and the economy.  This affected the social life of people because many of them were left unemployed, especially in areas where employment was in the mines, for example, the South Wales valleys (Allmendinger, 2019).

Conclusion

In conclusion, Keynesian economics theory was developed in the 1930s in response to the great depression.  According to the theory, demand is the driving factor of the economy, which determines the levels of employment instead of supply, and that is why governments should intervene to alleviate the high rates of unemployment. The theory replaced the classical understanding of employment, which argued that free markets would establish full employment equilibrium without government interventions unless special conditions prevail.  In 1975 Post-war consensus was developed, which believed in Keynesian principles. The consensus was the agreements developed among the political leaders and British people on their style of governance and policies passed. The consensus covered areas such the welfare provision, social security, full employment, national health services, and nationalization of public and industry utilities.

However, the post-war consensus was not effective because of high inflation,  state overload, stagflation, the 1973 oil crisis, and it came to an end in 1979. Margaret Thatcher, who was elected in 1979 as the British prime minister, also contributed to the demise of consensus by establishing policies of privatization,  anti-trade union monetarism, legislation, and taxation.  Post-war consensus was replaced by Thatcherism, which is a belief in small states and free markets. This was the time when the country was experiencing an economic crisis. It was developed by Margaret Thatcher, and her ideas was opposite that of Keynesian economics.  According to Thatcher, the government’s job is to control the money supply, and everything else should be left to the people. Some of the changes made Thatcher to improve Britain’s economy was privatization, minimizing the power of trade unionist, reduced inflation using monetary policy, and increased taxation and interests rates.

References

Allmendinger, P. (2019). Thatcherism. Thatcherism and Planning, 15-22. https://doi.org/10.4324/9780429438622-3

Chitty, C. (2014). The rise and fall of the post-war consensus. Education Policy in Britain, 16-32. https://doi.org/10.1007/978-1-137-32038-4_2

Coddington, A. (2013). Keynesian economics. Routledge.

Evans, E. J. (2013). Thatcher and Thatcherism. Routledge.

Farrell, H., & Quiggin, J. (2017). Consensus, Dissensus, and economic ideas: Economic crisis and the rise and fall of keynesianism. International Studies Quarterly, 61(2), 269-283. https://doi.org/10.1093/isq/sqx010

Harcourt, G. C., & Kriesler, P. (2013). The Oxford handbook of Post-Keynesian economics, volume 2: Critiques and methodology. Oxford University Press.

Stoker, G. (2006). Why politics matters: Making democracy work.

Vinen, R. (2013). Thatcher’s Britain: The politics and social upheaval of the Thatcher era. Simon & Schuster.