Technical Unemployment – Due to the introduction of new technology companies can achieve higher levels of productivity. This results in an excess of man power and results in a less labour. (Companies become capital intensive).
Keynesianism also faced the problem of balance of payments. The problem arose due to the fact that predictions could not be made with reference to whether or not consumers would spend their money on imports. People spending their money on foreign imports meant that money was leaving the UK, not circulating within the UK economy. As a direct result of this the pound was devalued during the 60’s under Wilson and floated by Heath during the 70’s. It was Keynes belief that when full-employment is achieved money shall be put back into the British economy; “Balance of Payments” was a contradiction to this.
Inflation is highlighted by Keynesianism, which is inherently inflationary. As full-employment became closer to being achieved under Keynesianism Trade Union bargaining power strengthened. Unions pushed for wage rises; increasing inflation. In the 1970’s inflation and unemployment increased by the same amount, this is said to be “stagflation” when this happens. Previously a trade-off had been between unemployment and inflation. Some economists argued the reason for an increase in inflation was due to a rise in oil prices out with government control. Some economists felt high inflation, economic and political problems represented signs for change.
Due the problems highlighted earlier, Keynesianism was shelved by the Callaghan Administration.
Monetarism
Monetarism was regard by economist to be the way forward after Keynesianism was shelved by the Callaghan Administration. Monetarists believe that inflation should be the key factor controlled by the government, unlike Keynesianism’s practice where employment was the main variable which had to be controlled.
There is disagreement between economists of the precise cause for inflation. There are three main explanations offered. Cost-push – This is when prices of goods are for up by producers as arsult of high production costs. Demand-pull Inflation – This is Keynes take on inflation. There is also the explanation favoured by the mmonetrists – Monetry Inflation; where there is toomuch money in the money supply in relation to the amount of goods/services available in the economy. The government is said to created inflation by following Keynesianism policies on demand management. Government spending has out weighed earnings through taxation. This deficit must be supplemented through public sector borrowing as shown in the diagram below.
Public Sector Borrowing Requirement (P.S.B.R.)
P.S.B.R is the difference between public sector income and public sector expenditure. As with government spending, if the public sector spends more than it earns in any one year the deficit must be balanced through financing.
Monetarists stress the effects of P.S.B.R on inflation, Keynesianism does not.
P.S.B.R has three categories:
1. Central Government (C.G.B.R)
2. Local Government (L.G.B.R)
3. Public Corporation (P.C.B.R)
Quantity Theory of Money
This is based upon the old fisher equation where MxV=PxT where;
M=The supply of money
V=The velocity of Money
P= The average price level (Inflation rate)
T=The total volume of transactions
The fisher equation is a tautology ie, it must be true; as MxV=the value of total expenditure and PxT=the value of goods and services purchased.
Quantity Theory is more than this as it states that there is a casual relationship between M and P ie, if M doubles then P will double, and if M halves the P will halve and so on.
Problems of Monetarism
The main problem with monetarism is that it creates high levels of unemployment, but cannot be blamed for all unemployment especially during the 80’s where mass unemployment occurred
A problem with monetarism was that an emphasis was placed on inflation levels and not full employment. As a result mass unemployment ensued.
Monetarists believe the role of the government is to set up environment where the private sector wants to invest, creating jobs. For the Government to create this environment they must keep inflation rates low. Demand management is not required when dealing with this situation as supply measures are used, as listed below:
- Reduce wages to enable firms to employ more people.
- Restrict trade union powers.
- Reduce state benefits and income tax to make lesser jobs more appealing.
- Encourage labour mobility. People should travel to regions with vacancies.
- Invest in training and work experience schemes to increase skill levels.
These steps are less potent than Keynesianism demand and create an environment where job security is threatened.
Economic recession and balance of payment deficits are problems encountered by monetarism. Experiments carried out during the Thatcher Administration coincided with a world recession and can not be blamed. However, it can be argued that the recession was a bad time for certain key industries as the government withdrew its support. In a bid to reduce inflation, interest rates increased making borrowing more expensive and the exchange rate high. The exchange rates made British goods more expensive when exporting which declined. Reliance on the export market meant that the manufacturing industry suffered badly.
