Explain the divergent views of finance, economics, politics and society held by Keynesians and Neoliberals.
To understand the divergent views relating to Keynesians and Neoliberals, it is first important to define the two economic groups. (Princeton) regards Keynesianism as “the economic theories of John Maynard Keynes who advocated government monetary and fiscal programs intended to stimulate business activity and increase employment”. defines Neoliberalism is a “Late-twentieth century variant of theory that competition among businesses in market with limited state regulation best fosters growth; specifically, advocacy of free enterprise in competitive global markets and movement of goods and capital unburdened by tariffs and regulations...” (Bourdieu; cf. Treanor). To understand the divergent views on finance, economics, politics and social policies of Keynesians and Neoliberals, these four policies therefore need to be broken down, explained and analysed.
Both Keynesians and Neoliberals manage the government finances in very different areas. Keynesians governments like that of Harold Wilson in 1964 focused a lot of spending in trying to maintain high employment, this meant keeping large numbers of workers in public owned industries such as mining. Neoliberals, however, focus on stimulating competition and making the business environment suitable for companies to thrive in. By doing this employment will increase and the economy will strengthen. Keynesians push for the reduction of money leaving the country such as through imports while further left Keynesians wanted the Alternative Economic Strategy (AES) supported greatly by Michael Foot, the Labour leader in the early 1980s. (Rowthorn) states that AES supporters wanted: “reflation of the economy, import controls and an incomes policy.” Supporters of AES believed that this would help revive the economy and the public finances after a dismal 1970s economic performance. Neoliberals on the other hand, thought that pressure from competition overseas would drive the economy as liberalising markets would help lower costs for customers while trying to maintain UK production. The main view by Neoliberals is that a more relaxed, laissez-faire approach is more likely to benefit businesses and the economy as they believe government control in markets is inefficient and can be problematic and costly to the economy. “The aim...was to reduce significantly the role of the state in the economy and allow market mechanisms to allocate resources.” (Conaghan et al.) Both Keynesians and Neoliberals differ on the best way to control finance in the economy showing the divergent views between the two in which Keynesians prefer hands on control, while Neoliberals choose to adopt a more laid back, free-market style.
Economically, Keynesians’ main goal is to achieve full employment which will cause economic growth. “This could be done via increasing government spending, cutting taxes, or balancing the budget—policies that work through different multiplier effects”(Tcherneva). This view argued that full employment led to economic growth and was the primary objective of the government. Neoliberals on the other hand believe that their primary goal is to improve the well-being of the population by encouraging competition and entrepreneurship. On the position of growth of the economy, Neoliberals argue that profits from large firms and organisations will be used to innovate and invest into new markets and new businesses, which will then lead to firms requiring more staff especially in new businesses. Keynesians and Neoliberals both want high employment and economic growth, however, they both strongly disagree on how to do this, Neoliberals prefer a private sector push with an entrepreneurial spirit involved, while Keynesians support consumption as the key to boosting aggregate demand and employment.
Regarding politics, Keynesians policies, were more significant after the ‘Great Depression’ in the 1930s to the end of the 1970s, however Keynesian policies such as increasing government spending is still common today. “Part of this intentional discretionary increase in spending was also targeted in a manner consistent with Keynesian thinking – namely redistribution towards those lower earners assumed to have a higher propensity to spend.” (Clift and Tomlinson). Keynesians believe government intervention is key, this means manipulating interest rates in making it affordable to borrow and therefore stimulate consumption and investment. Also by keeping a large public sector workforce and keeping industries nationalised meant that they could try and maintain their goal of full employment. Neoliberalism was introduced when Thatcher led the Conservative government to victory in 1979, the new political views used monetarist economic policies such as using interest rates to control inflation. The Thatcher government believed that using interest rates to manage inflation was the best use for them in an effort to bring down high inflation. The 1980s Neoliberalist government introduced privatisation. This greatly reduced the public sector workforce and encouraged competition and growth in the private sector while reducing government involvement. This shows a complete opposite between Keynesianism and neoliberalism in that both politically encourage completely different policies in regards to management of the private and public sector and also the use of government controls such as interest rates and injecting money in the circular flow of income.
Socially, Keynesians focus on supporting the population by trying to maintain full employment as a main priority and intervene as much as possible to try and achieve this. The social requirement is that Keynesians need the population to spend and consume their disposable income to cause a knock on effect and increase economic growth. Neoliberalist policies may be seen as focusing too much on the business and not enough on the typical person. For example, firms may reduce its costs by sacking staff. This may increase profits for firms, however, on the social scale, unemployment may rise initially similar to the Thatcher government until her second term when businesses increased investment and new firms set up to make more competitive markets. (Swank) argues that Neoliberalism tax policy “complement other supply-side policies in promoting long-run economic growth and employment”. It therefore may be argued that socially, Keynesians focus more in the short-run, while Neoliberals focus for long-run economic growth and increased employment.
The weight of the evidence indicates that Keynesianism and neoliberalism have very divergent views on political, financial and social issues due to differences in the use of government controls such as interest rates, focusing on the public vs private sector and even short-term vs long-term benefits. However, both Keynesians and Neoliberalists have similar economic goals in that they both want high employment and economic growth, but disagree on the methods to do this. Whatever Keynesian and Neoliberal economists view of the opposing policy, both are important in the day to day running of the current British government.
Bourdieu; cf. Treanor. Globalization Glossary. Available: http://www.sociology.emory.edu/globalization/glossary.html#N. Last accessed 20th Nov 2012.
Clift, B and Tomlinson, J. (2006). Credible Keynesianism?: New Labour Macroeconomic Policy and the Political Economy of Coarse Tuning.British Journal of Political Science. 36 (1), p29.
Conaghan, C.M, Malloy, J.M, Abugattas, L.A . (1990). Business And The "BOYS" The Politics of Neoliberalism in the Central Andes. Latin American Research Review. 25 (2), p3.
Princeton, University. WordNet Search. Available: http://wordnetweb.princeton.edu/perl/webwn?s=keynesianism. Last accessed 20th Nov 2012.
Rowthorn, B. (1981). The Politics of the Alternative Economic Strategy.Marxism Today. January (3), Page 4.
Swank, D. (2004). The Spread of Neoliberalism: U.S. Economic Power and the Diffusion of Market-Oriented Tax Policy. Available: http://www.people.fas.harvard.edu/~ces/publications/docs/pdfs/Swank.pdf. Last accessed 5th Dec 2012.
Tcherneva, P. R. (2008). Keynes’s Approach to Full Employment: Aggregate or Targeted Demand?. . 542 (1), 4.