The Evolution of Macro Economics in the UK - Assignment Example

 The Evolution of Macro Economics in the UK Question 1 After the failure of the UK economy in the Second World War there was a general lack of confidence towards the classical economic theory. As a result, according to Solman (2006), Keynes introduced his own ideas that were greatly followed by the government of the UK. Keynes rejected the classical ideas on the basis of the rigidities in the labour market, the problem of the deficiency of the demand and also the government’s deflation policies. The Keynes model was initially criticized by the monetarists. This was because the model proposed the demand management policies. According to Keynes the demand for the goods in the long run could be altered by the governments. The monetarists however argued otherwise. They criticized the long run and the short run objectives of the Keynesian model because they argued that problems like the inflationary expectations could result. According to the monetarists the Keynesian model was based on a lot of assumptions. They also argues over the rules and the discretion stating that the governments and the banks could make rules but in order to achieve the long run objectives the implementation was compulsory. This discretion was not that likely practically. They argued that discretion was necessary instead of the rules. Question 2 Say’s law states that ‘the creation of one product immediately opens a vent for other products’. By this, Say wants to imply that the supply makes the demand for itself. This means that he argues that excess supply would result the demand to increase too so that the demand is ‘created’ for the supply. Keynes on the other hand believed that demand did not change all of a sudden. Rather it had to be managed by some practices. He criticized the law stating that the UK economy had been demand deficient during the war. Keynes also stated that if Say’s Law was to be true, then during the war the demand should have been created for the excess supply. On the contrary, what really had happened was that the demand had been deficient during the war. In the circular flow model, if the business sector does not produce anything, then the households do not earn any income. This is where Say’s law is reflected in the model. Keynes critique to this notion was that although the revenue earned by the production in the firms does end up as income for the households, this may not happen instantaneously. Households are likely to spend as much income as they have. Question 3 In the 1940s the main change that had occurred in Britain was the switch to a market economy. The economy was changed to a market one so that the producers could be motivated and competition could be increased in the markets. This could lead to better choice and lower prices for the consumers in the long run. On the other hand however, the British government also intervened greatly from the period of 1945 to 1960. The intervention by the state was in the form of the demand management, nationalization etc. The market economy was beneficial because it led to the firms having better management strategies, however the problems that were faced mainly were that they were not accustomed to the government intervening. The government had to play various roles in the managing of the demand etc. As a result, the firms and the businesses felt that they had little powers. They seemed less keen to participate in the production process and work with the government. In order to keep the firms happy, the government was forced to not exercise its power very much. As a result, it was hard to achieve the objectives of demand management. Question 4 By this statement it can be deduced that Keynes was not much in favour of the market economy. Instead he preferred a mixed one with a predominant active private sector and a powerful government or public sector. He had the firm belief that a slack in the labour market was necessary to be present in the economy. This was because the presence of the slack would mean that there would be the government to intervene and solve the problem through the implementation of certain policies. If however the labor market was operating at the full employment level, according to him the classical model would fit in. This is because at full employment level the market forces have acted to get to the equilibrium and so there is no role that can be played by the government. The criticism in the statement that regards the full employment level as the classicals theory shows that he was not in favour of an economy that could operate on its own to achieve the best possible equilibrium. Rather he wanted the government to intervene in the entire process so that the role of the government is also defined and nothing happens out of its own accord. Question 5 Although an economic boom was observed in the 1980s, the policies of Thatcher could not be given credit for this. This is because although there was an increase in the GDP to a greater extent in the late 80s, this was not what had been predicted. Thatcher followed monetarism and the introduction of monetarism to the UK’s economy was a nightmare in the early 80s. Her policies were intended to give the workers the signals that the inflation would be reduced so that they could start working, however the plan backfired. Because of the growth of the M3 money there was a reduction of the inflation and the lowering of the PSBR in the late 80s. However the policies of Thatcher and the monetarists cannot justify this. This is because whatever had happened was not what had been predicted by the government or the monetarists. In the 1980s, the interest rates rose and the inflation fell in rapidly as the budget deficit contracted. Both of these changes had been the opposite of what had been anticipated. Therefore the economic boom cannot justify the policies of Thatcher because the effects that were achieved were not anticipated while designing the policies. Question 6 The most disappointing feature of the British economy is the fact that it has failed to match up with the growth in the industrialized countries. Britain was in a state of ruin after the Second World War however in the 1940s it did manage to get out of this devastating state quickly. Although it was a rich country (relatively) in the 1940s, the policies that it adopted later affected the economic prosperity of the UK greatly. In the 1950s the market economy was replaced by the mixed economy which meant that although the private sector was predominant, the presence of the government discouraged many firms. As a result, Britain’s growth fell. This continued till the 1980s until it had fallen well below the levels of the international living standards league. Thatcher’s policies in the early 80s also affected the growth adversely. The late 1980s however were years of economic boom for the country. The GDP and the interest rates increased a lot with a simultaneous decrease in the inflation rate. With increased interest rates the investment increased and with less inflation the exports rose. As a result, Britain became sone of the richest countries in the world. Read More