Extent of the Post-War Boom Attributed to Keynesianism - Essay Example

? To what extent can the post-war boom be attributed to Keynesianism Introduction The interaction between politics and markets cannot be doubted.In fact, the ability of markets to face strong economic turbulences has been related to the potential of local governments to foresee threats and to implement appropriate plans for managing the crisis. The responses of markets to political and private decisions have been extensively explored in the literature. Theoretical frameworks have been developed in order to explain the relationship between markets and social life. In this paper reference is made to Keynesianism, a theoretical trend based on the work of Keynes. The ideas included in Keynes’s famous book, ‘The General Theory of Employment, Interest and Money, which published at 1936’ (Arnold 2008, p.226) are presented for showing the key elements of Keynesianism. Other ideas proposed by Keynes in regard to markets and economics are also used in order to respond to the following question: Has Keynesianism influenced the post-war boom and at what level? It is proved that Keynesianism has highly contributed in the development of the post-war boom but the involvement of the above framework in this phenomenon has not been direct, in the context described below. 2. The method of Keynes The understanding of the role of Keynesianism in the post-war boom requires the explanation of the key aspects of the specific economic framework. In general, Keynesianism is based on the idea that ‘aggregate demand is influenced by a series of decisions, both public and private’ (Davies and Green 2010, p.27). Public decisions seem to be more powerful in influencing aggregate demand, compared to private decisions (Davies and Green 2010). Public decisions are those involved in a country’s ‘monetary or fiscal policy’ (Davies and Green 2010, p.27), as this policy is designed and implemented by the local government. It should be noted that in the context of Keynesianism ‘changes on aggregate demand are not always anticipated’ (Davies and Green 2010, p.27). Another characteristic of Keynesianism is the following one: for Keynesianism the changes on demand are often revealed with delay (Davies and Green 2010). In this way, there is no time for aligning wages with the actual level of demand, a fact that results to unexpected increase or decrease of labor (Davies and Green 2010). In other words, even if the vulnerability of aggregate demand towards public and private decisions is known, the measures taken by governments for securing a balance between demand and prices, including wages, are often ineffective (Davies and Green 2010, p.27). This means that Keynesianism offers the basis for the explanation of markets’ trends but it cannot provide a strategy for limiting markets’ exposure to changes. Another important element of Keynesianism is the relationship between consumption and income (Arnold 2008, p.226). The above relationship is likely to have three modes: a) the level of disposable income is a criterion influencing the level of consumption; b) as the disposable income increases so does the consumption and vice versa and c) any change on disposable income is followed by changes on consumption (Arnold 2008, p.226). Kadish (2010) focused on the view of Keynes in regard to market controversies. According to Kadish (2010), Kaynes considered these controversies had been resulted mostly because of communication failures and did not reflect the actual status of the economy (Kadish 2010). As a result, three different approaches would be appropriate for resolving problems related to the performance of markets: a) the positive; this approach would focus on the actual status of a market, b) the normative; this approach reflect the status that a market could have and c) the practical; this approach focuses on the tools that would be used for reaching a solution (Kadish 2010, p.118). In general, Keynesianism can be considered as related both to ‘classical macro-economics and effective demand’ (Rutherford 2007, p.125-126). On the other hand, Keynesianism has promoted the value of full employment: according to Keynes, the rejection of full employment, as a critical economic activity, cannot be justified (Rutherford 2007, p.126). In fact, it seems that full employment is necessary in order to protect the economy from ‘high unemployment disequilibrium’ (Rutherford 2007, p.126). In practice, it has been proved that Keynesianism is a theoretical framework which is closely related to disequilibrium (Coddington 2003, p.108). Indeed, Keynesianism can be used not so much for understanding the terms for securing equilibrium but rather for identifying the potential causes of disequilibrium in regard to trade and commerce (Coddington 2003, p.108). The effectiveness of Keynes’s views has been doubted. For example, for Hayes (2008) it can be quite difficult for macroeconomic theories, such as the theory of Kaynes, to reflect the actual status of economics since these theories tend to reflect both the stationary and the active elements of an economy (Hayes 2008, p.207). In this context, the theory of Keynes’s may not be able to reflect the actual status of markets which are characterized by continuous change (Hayes 2008, p.207). However, despite its potential gaps, Keynesianism has highly influenced critical economic decisions up today. In fact, it has been proved that Keynesianism has had an important role in the post-war boom. This role is analyzed below referring to appropriate literature. 3. Post-war boom and Keynesianism As explained above, Keynesianism focuses on the involvement of disequilibrium in economic transactions of all types. According to this view, Keynesianism could not be used for the promotion of trade; disequilibrium is expected to result rather to economic inefficiencies and not on economic growth. According to Coddington (2003) the involvement of Keynesianism in economic growth would be possible under certain terms. The following arguments could be used for justifying such view: modern economy is based primarily on reductionism and equilibrium (Coddington 2003). Reductionism is an economic system based on ‘a network of constraints and pre-defined objectives’ (Coddington 2003, p.108) so that there is no space for the development of decisions that are not aligned with the rules of reductionism. On the other hand, equilibrium implies a rather stationary economy, where changes are limited and not of critical importance in regard to economic decisions (Coddington 2003, p.108). In such environment, Keynesianism cannot be developed unless one of the following terms is met: ‘a) equilibrium is abandoned or b) reductionism is abandoned’ (Coddington 2003, p.108). The review of the views of Keynes, as indicatively presented above, can lead to the assumption that Keynes has tried to relate reductionism with disequilibrium (Coddington 2003, p.111). The latter reflects the views of Keynes on market conditions (Coddington 2003, p.111). In this way, Keynesianism has become independent from equilibrium (Coddington 2003, p.111). With such qualities, Keynesianism could be used for expressing modern markets that are characterized by changes and which are more related to disequilibrium than to equilibrium (Coddington 2003, p.111). The post-war boom has been mainly related to financial institutions. In fact, the loans provided by banks during the post-war period have been the key vehicles for the development of economies worldwide, especially those economies that promote the liberalization of markets; reference is made in particular to the Western economies (Arestis and Sawyer 2006). One of the key concerns of the post-war period has been the level of money available in the market. In the context of Keynesianism, an excess of money in the market could be possible, being related to disequilibrium between money demand and supply (Arestis and Sawyer 2006). Even if opposite views have been developed, as for example the views of ‘Kaldor (1981) and Moore’s (1988)’ (Arestis and Sawyer 2006, p.28), the excess of ‘money supply compared to money demand’ (Arestis and Sawyer 2006, p.28) has been explained as follows: in the context of a particular market banks may decide ‘to grant loans that exceed the level of money demand’ (Arestis and Sawyer 2006, p.28). Such practice may result to disequilibrium, but the latter is accepted as a critical element of the modern market, a view promoted in the context of Keynesianism. At the same time, the excess money supply, on which the post-war boom has been based, can be justified through another approach. In most markets, governments set the terms that will govern money supply (Arestis and Sawyer 2006). The intervention of a government in the decisions related to money supply is developed as follows: the government defines the level of deficit that would be transformed to public debt (Arestis and Sawyer 2006). This decision could be also taken by the country’s national bank (Arestis and Sawyer 2006). However, it is possible for the public sector debt to be defined without the intervention of the government or the central bank (Arestis and Sawyer 2006). In such case, the level of money supply in the market can be out of governmental control, a situation that may lead to disequilibrium but that could allow the high development of economic activities within the particular market; such perspective is accepted by Post-Keynesianism, which emphasizes on the distribution of money across modern markets (Arestis and Sawyer 2006). The involvement of Keynesianism in the post-war boom is analyzed in the study of Kerr (2001). In the particular study reference is made in particular to the role of Keynesianism in the development of British economy after the end of WW II. It is explained that it has been rather difficult for Keynesianism to influence the British economy in the post-war period (Kerr 2001). Indeed the particular period in Britain has been dominated with Pre-Keynesianism theories that could not accept the promotion of full employment and the introduction of ‘an effective demand-management strategy’ (Kerr 2001, p.52). Because of the strong impact of Pre-Keynesianism theories on British economy, the following practice has been employed by British governments in order to support full employment without alternating their traditional economic theories: economic policies were introduced for supporting full employment while at the same time an ‘oral tradition was held’ (Kerr 2001, p.52). In this way, Keynesianism has affected the post-war boom in Britain but not directly (Kerr 2001, p.52). Rather, specific aspects of Keynesianism were introduced, as part of existing monetary and fiscal policies (Kerr 2001, p.52). Reference should be also made to the following fact: all post-war governments in Britain had to face strong pressures from the ‘sterling lobby’ (Kerr 2001, p.52). The particular lobby emphasized on the need for enhancing the power of sterling in the international market (Kerr 2001). This trend has been opposed to the efforts of British governments ‘to promote Keynesianism by securing full employment across the country’ (Kerr 2001, p.52-53). The above example shows that Keynesianism can affect governmental policies but up to a level. Conflicting interests can limit the power of Keynesianism to enforce national economy through the expansion of full employment across a particular market. In any case, the role of Keynesianism in the explanation of economic decisions during the post-war period (Hein and Stockhammer 2011) cannot be doubted. There is a critical event that proves the increased power of Keynesianism in the years that followed WW II: ‘banks and financial markets became more autonomous’ (Hein and Stockhammer 2011, p.330). Indeed, the rules that were introduced after the end of WW II and which imposed strict terms in regard to lending, were ignored (Hein and Stockhammer 2011). Instead, banks increased the loans to the public using rather loose terms, so that money supply worldwide has been increased (Hein and Stockhammer 2011). The specific practice was based on the principles of Keynesianism. Indeed, Keynesianism promotes the idea that under conditions of high uncertainty in regard to the expected outcome, critical decisions are based on ‘confidence and conventional terms’ (Hein and Stockhammer 2011, p.331). In other words, the excess lending, as a practice that supported the post-war boom, has been highly promoted worldwide mostly because of Keynesianism, as analyzed above. 4. Conclusion According to the issues discussed above, Keynesianism has highly affected the post-war boom. In fact, the intervention of Keynesianism in post-war boom has been developed through two practices: a) Keynesianism has emphasized on the value of full employment as a tool for promoting consumption and demand, since the last two concepts are related, as accepted by Keynesianism, b) Keynesianism has promoted the idea that excess money supply can exist in modern markets and can be achieved through the increase of lending by financial institutions; for Keynesianism there are two conditions, ‘confidence and conventional terms’ (Hein and Stockhammer 2011, p.331), on which excessive lending would be based. The above two practices, i.e. the promotion of full employment and the expansion of lending by financial institutions, are closely related to Keynesianism; the particular framework has provided the theoretical basis for justifying these practices even if their promotion may be negative either at national and personal level; reference is made specifically to excess lending that has been related to strong financial turbulences in the global market. References Arestis, P. and Sawyer, M., 2006. A Handbook of Alternative Monetary Economics. Cheltenham: Edward Elgar Publishing. Arnold, R., 2008. Economics. 9th ed. Belmont: Cengage Learning. Coddington, A., 2003. Keynesian Economics: The Search for First Principles. London: Routledge. Davies, H. and Green, D., 2010. Banking on the Future: The Fall and Rise of Central Banking. New Jersey: Princeton University Press. Hayes, M., 2008. The Economics of Keynes: A New Guide to the General Theory. Cheltenham: Edward Elgar Publishing. Hein, E. and Stockhammer, E., 2011. A Modern Guide to Keynesian Macroeconomics and Economic Policies. Cheltenham: Edward Elgar Publishing. Kadish, A., 2010. Historians, Economists, and Economic History. London: Routledge. Kerr, P., 2001. Postwar British Politics: From Conflict to Consensus. London: Routledge. Rutherford, D., 2007. Economics: The Key Concepts. London: Routledge. Read More