The Viability of Economic Policy and the Priorities of Economic Policy

Abstract

As a policy maker, Keynes had most influence in the operation of the excess demand, over-full employment war economies of the First and Second World Wars. Discussion of the viability of policy has instead concentrated on its success or failure in postwar conditions in which Keynes played no active part. Indeed, there is very little by way of specific policy recommendation in the General Theory, aside from the proposition that increased expenditures, from whatever source, will have a positive impact on output and employment in conditions of excess capacity. Indeed, what is classified as conventional Keynesian policy often represents little more than the positive relation between govermnent expenditures and national income, or in more sophisticated versions something closer to Abba Lemer's idea of fiscal federalism in which fine-tuning expenditure and tax policy can stabilize the level of aggregate demand at full employment. Neither position represents Keynes' views on economic policy matters. Modem discussions of govemment expenditure policy thus seem to have broken loose from any theoretical linkage to Keynes' work and tend to ignore the postwar expenence of applying economic policy. In this respect the question of viability is not so much whether govenment expenditure is capable of influencing output, or prices, or some combination of the two, but the belief that in current conditions the priority in policy should be to reduce outstanding goverunent debt by means of govenment budget surpluses; the fact that export surpluses are often an associated priority in order to replace govemrnment spending suggests continued acceptance of aggregate expenditure theory. Rather than rejecting the viability of Keynesian policy, this represents a reversal of policy priorities and by definition precludes the use of expenditure policies to stabilize output and its full employment potendal. While postwar govemments enshrined the policy priority of full employment income and output in legislation, current debate concerns balanced budget amendments.