Friedman And Keynes Have Currency

The Keynesian social democratic consensus which prevailed from 1945 and the Atlee government to 1979 like any other consensus not without major differences and was replaced by a new consensus under the Thatcher government in 1979 based on qualified free enterprise. The Keynesian consensus had reached its height during the mid-70s and had come under stress from the Conservatives with their right wing economic and anti-union policies and Labour itself. Labour's small majority may have been the reason why they did not embrace more radical left wing policies after 1974 but when Thatcher came to power in 1979 the consensus was still intact.

Keynes had suggested that when the private sector could not or would not invest in the economy and caused a depression and high unemployment it was up to the government to increase its spending and investment. It was primarily a short term focus to cure an immediate problem. It had its origins in the Depression of the 1930s and became attractive when the dogmas of the day produced no answers to the problems they faced.

There was a fundamental change of policies after 1979. There had been no new ideas to capture the imagination of policy makers until the 1970s when the radical right promoted free enterprise instead of state control. The ideas were based on the work of Hayek and Friedman who maintained that state power was a threat to liberty and that tight control of the money supply and credit in fighting inflation was more important than Keynesianism. A small number of influential people articulated these new policies and gave them force. The collapse of the Keynesian system in the 1960s and 70s gave Thatcherism its chance.

Thatcher never pursued full employment and watched it rise to 3 million. Trade union power diminished greatly and contacts almost completely ceased because they were seen as being involved in bringing down governments. Privatisation increased and pushed the economy into private rather than the public ownership. Equality was replaced with 'stimulating inequality' and differential pay as an incentive to effort and enterprise. The welfare state and foreign and defence policy remained largely intact.

What parties say in opposition is not important compared with what they do when they are in power. Labour became more moderate. Union membership decreased, home owning and share ownership increased and the Conservatives got more of the working class vote. Labour adapted its policies to meet the new electorate and in 1997 another major realignement emerged as New Labour won a landslide victory.

Monetarist and Keynesian rules are still influential. Labour and the Conservatives are philosophically a lot closer than they used to be. Labour, since the Kinnock review, has accepted free market economics. The Conservatives accepted unbridled market economics would not work. The gap between rich and poor has however continued to grow. All four Conservative Chancellors lowered tax burdens on the rich and refused to use Government expenditure to reduce regional unemployment. Labour under both Tony Blair and Gordon Brown are committed to raising taxes on the better off, a more effective regional policy and to reducing inequality. It has abandoned its unilateral anti-nuclear stance and embraced Europe.

Monetary policy is very much in focus at the present time. The cut in interest rates should increase consumption expenditure and investment. Exports should rise and aggregate demand increase. It should help real GDP growth and increase inflation. These things tend to happen in cycles. Those who have anticipated all of this will of course be making a profit from buying and selling bonds. New information may change everything as markets can be volatile and there are a number of broad policy categories and different sources of change.