What Was the ‘Keynesian Consensus’ and Why Did It Break Down?

Essay:

What was the ‘Keynesian Consensus’ and why did it break down?

In this essay, I will be explaining the Keynesian Consensus, also known as the Post-War Consensus, as well as its concept and I will also be looking at why it broke down in detail. I will conclude by summarising what has been said in the essay.

John Maynard Keynes’ ideas were called ‘Keynesianism’. It is government intervention in economy by using demand management to achieve full employment. Demand management and government intervention were Keynes’ solution to recession. The dictionary’s definition of Keynesianism is ‘of or pertaining to… the policy of maintaining high employment and controlling inflation by varying the interest rates, tax rates, and public expenditure’.

The Keynesian Consensus lasted from the end of World War II to 1979. The foundations of the consensus can be traced to the reports of William Beveridge, who examined the existing welfare state and suggested ways of improving them. The suggestions were social security benefits, policy of ‘full employment’, the NHS, public housing and free compulsory secondary education up to the age of 15. The consensus can be considered as a belief in Keynesian economics. The suggestions mentioned by Beveridge were established by all governments (both Labour and Conservative) in the post-war period.

There is a lot of evidence to show that Keynesianism was successful. During the 1950s and 1970s, unemployment was low as there never were more than 1 million people unemployed during this period. Wages grew by 20% and economic growth remained at 2% a year on average. Also, the rate of inflation averaged at 4.5%. Harold Macmillan boasted about these successes which were achieved by applying the Keynesianism mechanism of demand management.

Although Keynesianism worked or seemed to be working for some period of time, it ran into some difficulties. Demand management makes it impossible to maintain a stable level of low unemployment over the...