Table Of ContentKEYNES AND ECONOMIC POLICY
Keynes and
Economic Policy
The Relevance of The General
Theory after Fifty Years
Edited by
Walter Eltis
and
Peter Sinclair
Introduced by The Rt Hon Nigel Lawson, MP
£
M NEDO
in association with the
MACMILLAN Pal grave Macmillan
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ISBN 978-1-349-10340-9 ISBN 978-1-349-10338-6 (eBook)
DOI 10.1007/978-1-349-10338-6
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First published 1988
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British Library Cataloguing in Publication Data
Keynes and economic policy: the relevance
of the General theory after fifty years.
1. Economics. Keynes, John Maynard, 1883-
1946. General theory of employment interest
and money Critica( studies
1. Eltis, W.A. (Waltcr Alfred), 1933-
ll. Sinclair, P.J.N. (Peter J.N.)
330.15'6
Contents
Preface by Sir John Cassels. CB IX
List of the Contributors Xlll
Introduction by The Rt Hon Nigel Lawson. MP XV
Part I The Adequacy of Market Forces for the Achievement of
High Employment
I Are Market Forces Adequate to Maintain Full Employment?
If Not, Can Demand Management Policies be Relied Upon to
Fill the Gap? 3
Michael J. Artis
2 The Role of Demand Management in the Maintenance of
Full Employment 25
Bennett T. McCallum
Part II Money Wages and Employment
3 Wages and Unemployment Half a Century On 45
Patrick Minford
4 Wages and Economic Activity 65
Stephen Nickell
Part III The Effect of Fiscal Reflation Upon Employment
5 The Effect of Fiscal Reflation upon Employment 79
Francis Breedon. Alan Budd. Paul Levine and Peter Smith
6 Aspects of the Theory of Fiscal Policy 102
Maurice Peston
Part IV The Inflationary Impact of Fiscal Policy
7 Inflation and Fiscal Expansion 127
Christopher Taylor
8 Is Fiscal Expansion Inflationary? 139
Peter Sinclair
v
Part V The Significance of Public Sector Borrowing
9 Government Deficits and Debts. The Necessity and Cost of
Adjustment: The Case of Italy 175
Giampaolo Galli and Rainer S. Masera
IO Measures of Fiscal Stance and Rules for Stabilising the
Economy: The Case for Separating Measurement from Policy 216
Marcus Miller and Alan Sutherland
Part VI Policy to Control Interest Rates
II Interest Rates and Macroeconomic Policy 235
John S. Flemming
12 Interest Rates and the Conduct of Monetary Policy 246
Terence C. Mills and Geoffrey E. Wood
Part VII Should Reflationary Fiscal Policy Have Priority Over
Monetary Policy?
13 Monetary and Fiscal Policy in the UK 271
Alan Walters
14 Should Fiscal Policy Rule the Roost?: The Co-ordination of
Monetary and Fiscal Policy 295
. David Currie
Part VIII Keynesian Policy in a Historical Context
15 Keynes on Interwar Economic Policy 317
Nicholas H. Dimsdale
16 Keynes and the TUC in the 1930s and the 1980s 340
Bill Callaghan
17 Keynesian and other Explanations of Post-war
Macroeconomic Trends 354
Robin C. O. Matthews and Alex Bowen
Part IX The International Dimension
18 How Valid is International Keynesianism? 391
W. Max Corden
Contents VII
Part X Keynes and UK and German Economic Policy
19 The Irrelevance of Keynes to German Economic Policy and
to International Economic Co-operation in the 1980s 411
Ernst Helmstiidter
20 The UK Government's Financial Strategy 428
Terence Burns
Part XI Conclusion
21 The Continuing Relevance of Keynes to Economic Policy 451
Walter Eltis
Index 465
Preface
John Maynard Keynes published The General Theory of Employment.
Interest and Money in February 1936, when UK unemployment was consi
derably in excess of 10 per cent. With unemployment again close to 10 per
cent fifty years later, we thought it would be interesting and useful to invite
an expert group of economists to examine how far the arguments which
Keynes presented in 1936 are still central to the explanation of our failure to
achieve high employment. We are delighted that so many very distinguished
economists from government and academic life agreed that this question is
worthy of close attention. The Chancellor of the Exchequer's 'Introduction'
to the Conference which opens this volume underlines the directness of its
subject to the concerns of government.
The National Economic Development Office's close links with government
and the universities mean that we are uniquely placed to provide a forum
where experts drawn from both these worlds can meet to discuss economic
questions of national importance. When we sent our invitations to potential
participants in December 1986 we outlined the questions we wished them to
address in the following terms.
We regard it as vitally important to those responsible for the management
of economics to know which elements of Keynes's seminal contribution
are still relevant to the formulation of economic policy. Some of his central
propositions have been superseded by more recent theoretical work, while
others have been discredited by events in the 1970s and the 1980s. At the
same time there may well be theoretical and empirical support for the
continuing relevance and practical applicability of several of the proposi
tions of the General Theory. It is crucial to know which propositions
ought now to be discarded and which still stand, albeit in modified form.
We suggested that discussion should focus on the following questions:
The adequacy of market forces for the achievement of high employment. Did
Keynes underrate market economies' powers of self-correction, or is there
justification for his belief that there is a general case for government
macroeconomic intervention?
Money wages and employment. Keynes insisted that even large falls in money
wages would not necessarily raise employment. Does it now appear that
money and real wage movements matter more than he supposed?
The effect of fiscal reflation upon employment. Keynes argued that when
labour was in excess supply fiscal reflation would always raise effective
IX
x Preface
demand and reduce unemployment, but how much of his belief in the efficacy
of fiscal reflation still stands?
The inflationary impact of expansionary fiscal policy. Was Keynes right to
believe that expansionary fiscal policy would not significantly raise the
inflation rate when unemployment was high?
The significance ofp ublic sector borrowing. How far do the adverse long-term
effects of persistent government borrowing undermine the short-term case
for deficit financed expansion?
Policy to reduce interest rates. Is there still support for the view that monetary
expansion will generally reduce interest rates?
Should reflationary fiscal policy have priority over monetary policy? Does the
experience of the 1960s, and 1970s and the 1980s support the widely held
Keynesian view that reflationary fiscal policy should have priority over
monetary policy?
The international dimension. Countries which pursue Keynesian policies in
isolation often experience deteriorating trade which forces their reversal: is it
practical for countries to co-operate internationally to implement Keynesian
expansion?
History. How well do Keynesian explanations of high unemployment in the
1950s and the I 960s, and the rise in unemployment in the 1970s and the 1980s
stand up?
The contributors who accepted our invitation each addressed their attention
to one of these topics. They presented earlier versions of their papers when
we met in London on 15-18 September 1987 to discuss these questions, and
the final versions which appear in this volume have benefited greatly from the
opportunity for debate and discussion that this offered.
The major parties represented on the National Economic Development
Council are HM Government, the Trades Union Congress and the Confede
ration of British Industry. Since these have differing political priorities, it is
incumbent on us to approach all questions from a politically neutral
standpoint where our sole interest is the elucidation and clarification of the
principal issues that need to be resolved. Needless to say, we are aware that
academic economists have a variety of approaches to practical questions
which often have strong political implications. We therefore considered it
important that each of these central questions should be addressed by two
economists, where one could be expected to be sympathetic to a Keynesian
approach while the other would be likely to argue that this has been
superseded by more recent work. The distinguished economists who accepted
our invitation have not all written along the lines we predicted, but the
overall balance of the book is about as we expected.
Preface Xl
A seminal event in the history of the UK economic profession was a letter
which 364 economists addressed to The Times in March 1981 which was
strongly critical of the economic policies of Mrs Thatcher's government. Of
the UK contributors to this volume who hold university teaching posts in
economics, five signed that letter, while six did not, which suggests that we
have approximately equal representation of potential supporters and critics.
Our authors also include the most senior economists in HM Treasury, the
Bank of England and the Trades Union Congress, and a number who hold
posts overseas. We are grateful to the participants for the very great trouble
they have taken to produce articles which are undoubtedly of very high
quality.
The originator of the project which has led to this book and the prime
mover in seeing it through every stage to its fruition has been Walter Eltis,
the Economic Director of the National Economic Development Office from
1986-1988. He has edited the articles in collaboration with his Oxford
colleague, Peter Sinclair, who looked after the more technical aspects, and in
the final chapter he writes of SC'lle of the conclusions that emerge. The
administration of the Conference and presentation of the articles for
publication has been handled by Inge Mann. I hope that the book and the
conclusions to be drawn from it will receive close attention from those who
are concerned with the theory and practice of economic management and
will assist debate on the best practicable methods of returning to high
employment.
JOHN CASSELS
Director General
National Economic Development Office
