The economic consequences of monetarism: a Keynesian view of the British economy 1980–90

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The British economy is in the throes of probably the deepest recession since the last war and possibly the deepest so far this century. The recession has been generated, at least in part, by deliberate Government policy, as a supposedly temporary by-product of monetarism. This article sets out to measure the lost output and employment which would be incurred by continuing to pursue present policies over the next decade. It does so by comparing the likely outcome for the economy under monetarism, as it has been adopted by the Conservative government, with that under Keynesian policies of demand management aimed at achieving full employment through fiscal expansion. The consequences of monetarism have been estimated using the Cambridge multi sectoral dynamic model f of the British economy. This is a structural model which does not impose the assumption of long-run full employment on the results. Indeed it has the property that the automatic forces tending to return the economy to full employment after a disturbance are very weak since it assumes that money wages are inflexible downwards. This is in contrast with monetarist or neo-classical models which usually assume full employment in the long-run (and in some extreme models in the short-run as well). The purpose of present policies is of course to reduce the rate of inflation. The mone tarist view is that inflation is purely a monetary phenomenon and originates in govern ment failure to control the money supply. In this view, it is enough to gain this control and the problem is solved. In contrast, the theoretical position adopted here is that inflation is the result of an administrative process in which industries pass on costs to prices. Cost inflation in turn is attributable to import costs, which are affected by the exchange rate, and wage costs