CONCLUSION2

CONCLUSION

What does the evidence show as the correct interpretation between
these three rival schools of thought? Typically in economics, the
macroeconomic realities at the onset of the new millennium are
sufficiently varied as to leave plenty of room for disagreement.
Contractionary monetary policies were pursued by many developed
nations in the 1980s which did provoke industrial closures,
increasing unemployment and widening income differentials.
Clearly many institutions in countries all around the world had
grown used to government protection and were highly resistant to
change. (The same argument continues to be repeated today for
much of Europe’s agricultural and labour markets which have not
taken all the free market medicine swallowed by other nations.)
Considerable pain was thus endured by many peoples for many
years before inflationary expectations were squeezed out of their
economies.
For less developed countries, the 1980s was ‘the lost decade’ since
living standards were lower in 1990 than they had been ten years
earlier (see Table 4.1). Similarly, in the USA and UK, though
average incomes increased, the gap between the richest and poorest
nonetheless widened.
The economic sacrifice made by those suffering these deflationary
policies was certainly not minimal, therefore, prompting
Friedman to comment in 1993 that the New Classical argument
© 2004 Tony Cleaver
‘as a hypothesis about the real world . . . has been contradicted by
experience’. His monetarist assertion that it was necessary only
to control money supplies to reduce inflation and, further, that the
macroeconomy would return to equilibrium after suffering only
short run unemployment could equally be contested, however.
Money supplies both in the UK and the USA proved impossible to
contain in liberalised financial markets (see Chapter 5), prompting
additional deflationary measures. And the short run is a very
elastic, imprecise concept. How long can democratic governments
leave a country languishing in recession before the free market
supposedly returns to equilibrium? Ten years or more is a long
‘short run’ and would seem to lend support to New Keynesian
assertions that economies can get stuck in a recession.
Through the 1990s and into the new millennium, however, we
have seen steady improvements in certain countries that have
persevered with supply-side policies. Nations as different and
distant as the UK, Chile, New Zealand and the USA have all experienced
consistent falls in inflation and increases in employment and
economic growth as the reforms instituted have slowly brought
results. Microeconomic supply-side policies to free up markets have
begun to work, making resources more mobile to adjust to changing
world demand. At the same time, however, as global fortunes have
been buffeted by one crisis or another, central banks in the USA and
the UK (less so in Europe) have similarly acted to stabilise aggregate
demand by swiftly bringing down interest rates as private
sector consumption has faltered.
In conclusion, both macroeconomic and microeconomic reforms
are necessary to secure growth with stability. The level of aggregate
demand must be high enough to prevent recession, and government
monetary and fiscal policies can work to offset booms and slumps,
Table 4.1 Gross National Income per capita (US$).
1980 1990
Sub-Saharan Africa 560 480
Latin America and 1,960 1,730
Caribbean
Source: World Bank, World Tables 1994.
© 2004 Tony Cleaver
as Keynes advised. Equally, however, if resources are protected in
inefficient and unchanging employments then an economy cannot
escape long-term sclerosis and decline. Much time, encouragement
and painful effort may be needed to facilitate the occupational and
geographical mobility of a nation’s productive assets.
Has recent experience demonstrated the failure of Keynesian
economics and the success of the supply-side revolution? It is a
false dichotomy. Keynesianism does not recommend unrestricted
interventionism and neither can deregulating and liberalising trade
guarantee growth and development. There is a role for both government
action and free markets.