The Theory That Shaped the British Economy - Essay Example

WHICH ECONOMIC THEORY HAS SHAPED THE BRITISH ECONOMY MORE: KEYNESIANISM OR NEO-LIBERALISM? by Introduction TheUnited Kingdom has been historically, one of the largest and most developed economies; influenced fundamentally by its past error as an Imperial global society. It is ranked amongst the top 10 economies globally, founded on different variables present. It is amongst the freest of economies, with improvements witnessed in labor freedom, government spending, trade and monetary freedom. Currently, it is the service sector, which dominates its economy in terms of contributions to the national GDP (Markwell, 2006:11). This essay will show that Keynesianism economic theory has shaped the British economy to what it is today. Growth of the Economy: A Background The influences of both Keynesianism and Neoliberal politico-economic thought, has been fundamental to the UK economy and fiscal policy measures. Keynesianism, referred to as Keynesian economics, pertains to the view that, in terms of recessions especially within the short-run, the prevailing economic output of a given state is influenced fundamentally, by the existing aggregate demand (Ankerl, 1978:25). John M. Keynes, a British economist, was of the view that a nation’s aggregate demand (total economic expenditure), does not necessarily equate to the economy’s prevailing production capacity. Neo-liberal economic thought on the other hand, espouses the need for transfer of economic control, from the public sector, to the private i.e. the denationalization and privatization of industry (Taylor & Jordan, 2009:149). This is pegged on the belief that the effect will be an improvement of the nation’s economic health, and governance that is more efficient. It was fundamentally founded on John Williamson’s ‘Washington Consensus’, which entailed a list of proposed policy reforms, which had gained approval from international actors such as the World Bank and the IMF; amongst other entities (Mirowski & Dieter, 2009:38). Schools of Thought: UK’s Political Economy The political economy of Britain was pegged majorly on its global empire, as well as its geo-political, economic and military advantages in terms of industrial production and output, and its superior navy. However, influences of the two global wars were to have effect on the nation, resulting in massive unemployment, unrest and inflation. This necessitated a number of tough measures i.e. the Tariff Reform, amongst others in light of the ensuing ineffectiveness of ‘free-market’ economy (Birner & Rudy, 1994:45). Radical movements arose i.e. the Fascists under Oswald Mosley and the Communist Party of Great Britain (CPGB) amongst others. These were all rooted in varying ideals, aimed at alleviating the economic stagnation, as well as job creation and development. Its energy, automotive and pharmaceutical industries further contribute to its annual GDP, hence enabling it maintain its position amongst the global industrial nations. The decline of the British Empire was critical to the abandonment of mercantilism to be replaced by ‘free trade’ under Capitalism (Akerlof, 2007:17). The Labour Party, influential in Britain’s democratic history, introduced sweeping reforms in the Post-WWW11 era (Hazlitt, 1959:67). This included an increase of taxation and the nationalization of industries, as well as the creation of a welfare state, equipped with social security, national health cover and pensions. This however was to be made redundant by the presence of long-term economic malaise, in addition to severe inflation, the rise of union power and increased workers’ strikes. The ensuing complications resulted in the election of Margaret Thatcher, influential in the policy measures that were to follow (Keynes, 2004:14). Referred to as Thatcherism, her administration-led austerity measures included a greater weakening of trade unionism, a reduction of government-role in the economy, and enhanced privatization. These measures took place around the same time as US President Ronald Reagan’s ‘Reaganomics’ policy measures. Influential in this, was the existence of different schools of thought; concerning the politico-economy of the nation (Dimand, 1988:24). Influential to this, were such ideals as Liberalism and Neo-liberal thought, Feminism and Keynesianism amongst others. Keynesian economists are of the opinion that the private sector, in terms of decisions, does at times lead to macro-economic outcomes, which are inefficient (Emmet et al., 2010:39). As the economy was unable to maintain itself, in terms of industrial output and macro-economic capacity, government intervention was necessary using under-utilized savings into work, by way of government expenditure. This was towards stimulating the economy, by way of inducements towards investing in the nation. This influenced the increase in output witnessed, as more people became employed within the manufacturing and mineral resource industries; thus reducing unemployment (Mayer, 1987:17). This situational response to such measures was the raise in business output, thereby portending to large r profit margins and cash flow. This spurred business optimism, founded on the complementary nature of government and the business sector. However, a defining moment in British history was the Thatcher era, which coincided with the Reaganomics of America (Fletcher, 1989:121). In terms of policy implications, Thatcherism was fundamentally influenced by neo-liberal thought. The theory seeks to transfer greater control of the existing economy to the private sector, from the public arena. This necessitates enhanced privatization, as opposed to nationalization of a majority of the prevailing sectors of the economy (Noam, C. & McChesney, 2011:153). Tax reform was also necessary, towards broadening the existing tax base, with the flotation of exchange rates, as well as enhancement of market-determined interest rates (Schumpter, 1996:78). Trade liberalization was also invigorated through elimination of existing quantitative restrictions, thus encouraging both long-term growth and competition. The liberalization of the capital account; in regard to the balance of payments, provided individuals with the opportunity of investing their funds overseas. In turn, Foreign Direct Investments (FDIs) were also encouraged, as long-term investment measures. State enterprises, which had earlier been nationalized, were thereafter privatized, with the aim of enhancing market driven supply and demand for goods and services (Rausser Swinnen & Zusman, 2011:111). This was influenced by the need for decreased government regulation, to provide efficiency and effectiveness of market entry, as well as enhance competition through promotion of choice and variety. An exception is concerning aspects of consumer and environment protection grounds, as well as safety and the prudent oversight of existing financial institutions. Majorly so, was also the inclusion of enhanced legal security provisions, in term of property rights and patents enhancing British multinationals into continued economic growth (Milton, 2002:98). Counterarguments Neil Davidson produced an extensive exposition of neo-liberalism as a theory that shaped the British economy between the years 1973 to 2008. He states that the mid 1970s brought about the beginning of a new economic period, which was the development of capitalism where labor and capital could be restructured. This view asserts that the economic crisis in the mid 1970s ended the Keynesian economic policies that supported the arrangements of the ruling class. He states that the re-emergence of major systemic crises, a growing global integration of capital, and formation of regional production networks in certain industries, growth of cross-border trade and expansion of international financial flows was the work of capitalism (Davidson, 2008). It has also been argued that neo-liberalism has had effect on British economy in the sense that politicians in Britain have embraced market and competition as a means of encouraging economic growth and maximizing efficiency both in private and public sector. Neoliberal has had a major influence not only in the British economy but also in constitutional law and theories of knowledge. Such arguments point to the Thatcher era where the Conservative party wanted a moral rejuvenation of society by using different sources. A key to this was to restore traditional values that had been eroded by social democracy. Neo-liberal measures were applied in all spheres of life in Britain. Neo-liberalism was implemented in education and training to offer wider opportunities for growth of capital to the poorest in the society as an aspect of social justice (Davidson, 2008). Another argument against Keynesian economic theory in Britain is that short-term government fix lead to large-scale government programs that pose monopoly on infrastructure that discourages private sector to grow. Therefore, while the Keynesian theory was at play, the government increased spending but built a large budget deficit. Conclusion There have been calls for increased government regulation, based on new forms of Keynesian economic models. There has been a reduction of economic freedom, with expansionary public expenditure resulting in the generation of considerable budgetary pressure. Currently, the principal fundamentals remain weak, especially due to the existing government debt. This has caused the resurgence of Keynesian thought, especially due to the similarity of the current global economic crisis and the past Great Depression, the oil shock and stagflation of the 1970s era. Increased government intervention has been informed by the prevailing lack of market-driven balance (Menger, 2000:39). Though both Keynesian and neo-liberal schools of thought have been fundamental in safeguarding the nation’s economy in terms of both micro- and macro-economics, the latter school of thought was more influential. This is as showcased by the influential nature of Prime Minister Thatcher. This era was characterized by enhanced privatization of national industry, as well as the reduction of government intervention/ regulation. This was aimed at stimulating the economy, through increased savings to be channeled into vital sectors of the economy (Hayek, 1944:49). As the theory of economic and political practices, neo-liberalism was considered rationalist in nature relying primarily on the reason that little or no government interference. The reason was to enhance free market economy, where the market determined the pricing of goods and services (production). Reference List Akerlof, GA 2007, The Missing Motivation in Macro-economics. American Economic Review, 97(1): 5-36. Ankerl, G 1978, Beyond Monopoly Capitalism and Monopoly Socialism. Schenkman, Cambridge. Birner, J. & Rudy, V 1994, Hayek, Co-ordination and Evolution: His Legacy in Philosophy, Politics, Economics and the History of Ideas. London, New York: Routledge. Davidson, N, 2008, Nationalism and Neoliberalism, Variant 32 (summer 2008), www.variant.org.uk/pdfs/issue32/davidson32.pdf Dimand, RW 1988, The Origins of the Keynesian Revolution. 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