Evolution of UK Economic Policy: From Keynesianism to Monetarism

[Music] let's talk about british economic policy in the 20th century

like so many other things economic policy was

a thing that both parties agreed upon in the years following world war ii

in the uk there was a post-war consensus policies that

the two parties agreed upon big policy goals about how government should work what its role in society should be

and that consensus extended to how the economy should be run the consensus surrounded an economic

approach called keynesianism pictured here is john maynard keynes he was an english economist after whom this

economic approach is named and keynesianism is an economic approach that tries to use the government to

solve the business cycle and if not solve the business cycle at least mitigate the

effects of the business cycle we won't go too far into the economics here but

you know that if it's a capitalist economy like the united states economy like uk's economy

it's going to have booms and busts and the busts we call recessions now there was a

recession in the united states in 2009 there was one in 2000 there was one in 92

and generally these track globally as well because the economies are are inter uh linked

so the business cycle then

ha leads to times of euphoria where things are going great

and then it leads to times where things are going bad when things are going bad there's unemployment

um there's hunger there's a lack of of jobs a lack of profits to be earned in the business sector

and um this can make capitalism a very bumpy ride

and you know just to be clear when we talk about capitalism what we're talking about this is an

off-the-cuff definition so um not the best definition you'll find but what we're talking about with capitalism

is the the production

and price of goods is determined

by the market so a company that's making something

decides how much they want to make how much they want to sell it for and the buyers will

meet that price or if they won't then the producer will have to reduce the price

but the government doesn't have a very big role in determining what gets produced or how much it it costs we

leave that to economic forces that has been a tremendous engine of economic growth for many

countries including the united kingdom but as i said it's a bumpy ride because you have these boom bust cycles well

we had a really bad bust cycle in the 1930s right the uh great depression

massive unemployment all kinds of human misery

and you know that was in everybody's mind coming out of

the second world war so into the 1940s

and so the idea was well maybe we can use the government to help smooth out these cycles

to keep unemployment low even during

recessions and to maybe take advantage of the good times

to replenish the coffers so that there are resources there to spend in the bad times to keep things um keep things

going now during world war ii the um

uk economy like i see the uk government like the amer us government was very involved in the economy a war plan got

to make sure the tanks were being built and all that and it showed it was pretty competent at doing that because

ultimately the countries were able to um to

build what they needed to win the war so there was a lot of faith in the government at this time and that's a

belief that um [Music]

government can smooth out

the business cycle okay they can do this

by uh raising taxes in good

times and spending money

in bad times because what is a recession after all but a lack of demand when there's a recession nobody's buying

anything maybe because they don't have jobs to earn money to buy stuff with or maybe just because they're they're

saving because they're they're scared because they see the economy going down well at that time then the government

can step in increase its spending and that will keep people employed that will keep demand

for the products that companies are are producing and it will stimulate the economy so spending money in bad times

will stimulate the

economy and in order to have that money to spend in

the in the bad times then government needs to raise taxes in the good times uh to

[Music] replenish the coffers as i said and might also raise interest rates as

well the cost to borrow money you know if you want to buy a car

if you want to buy a house usually take out a loan how much does it cost to take out that loan that's determined somewhat

by the government so maybe it could make it more expensive to borrow money when

times are really good and that'll cool things down it won't be as easy to to buy a big house or buy a nice car

and then lower those interest rates when times are bad

this is a large role for the government then in the economy

[Music] and so basically from the 1940s to the 1970s or so the government in the uk

took a keynesian approach to two things now there were some problems with that

we find that rather than stimulating the economy during a recession

government tended to stimulate the economy when elections were coming up and you can probably guess why that is

right they want the economy to be doing really well when voters go to the polls so that they will re-elect the people

who made those policies uh and you can ultimately end up when you carve out a larger role for the

government in the economy you can end up with a larger government and government can be less efficient it's not as

responsive to market forces as as businesses and if the government does not do enough

to to tax when the times are good to replenish the coffers then it's going to have to borrow the

money when the recession comes in order to have the money to to spend to stimulate the economy

so uh lots of government borrowing if the debt gets too big government debt

gets too big then it becomes harder to borrow more

money just as if your individual debt gets too big it's

harder to take out more credit cards you have to pay more interest on

your credit cards um so keynesianism has this idea and it's an idea that's

still around that the government could play an active role in the economy make things better for people by smoothing

out the uh the ride but you know some problems in

in practice this is contrasted with a policy

approach called monetarism i won't say as much about monetarism but enough to to draw the contrast here

monetarism is what the uk switched to when

margaret thatcher became prime minister uh in

what was the late 70s and this was about the time that in the united states ronald reagan became

president and followed a similar idea these these ideas they tend to um they don't exist within one country

right lots of countries are kind of following similar waves um in terms of uh the ideas that they're

they're following and so the uk abandoned keynesianism abandoned this this

consensus that it had in terms between the conservatives and the labor party in terms of how to manage the economy

monetarism suggests the government should just ignore

unemployment it should not be so invested in the economy it should not be trying so

hard to regulate the economy let the market

operate freely and it will produce the most wealth

if the government tries to get involved if it's trying to subsidize certain

things if it's trying to spend money in order to stimulate the economy it's going to end

up creating inefficiencies it's going to spend money on businesses that shouldn't have money spent on them for example

because they're not very good businesses and ultimately then that it will distort the market that will damage the market

so it's best just to allow the market to run free um these are the ideas of this guy here

milton friedman influential economist so smaller role for government

less taxing particularly of the wealthy less spending when recessions come

around uh and overall then the idea is the economy

will will be more productive and so margaret thatcher's government implemented this kind of economic policy

when they were in power in the 1980s and as a result

you had much higher unemployment and the government's spending less money

that's less demand in the economy for things then so fewer people are needed to fulfill that

demand more unemployment and more

inequality rich get richer the poor uh

more likely to end up unemployed so you know both of these are economic

theories um that suggest practices that governments could could follow both

um you know have run into trouble when being practiced right

from keynesianism leading to more inefficiencies as

[Music] the government became a bigger part of the economy

monetarism led to an increase in unemployment inequality and i think a feeling among many in

the uk that the government had kind of gone away from and were all in this together

view to a you're on your own try to survive um view

was the problem with one of the theories or or both of the theories or was the problem with the implementation that's

the age-old theory age-old question when it comes to assessing uh theories

it's hard to attribute any outcome to a particular economic approach because

there's a lot else going on and um it's it's no

ideologies no theories ever applied perfectly by the humans who are in charge of of doing so but this was the

shift the uk underwent a shift that was reflected more widely in the world as other

countries underwent similar shifts