Demise of Keynes

Essay title: Which various factors (intellectually and economically) contributed to the

demise of Keynesianism?

At the end of the Second World War, the economies of Europe and to a lesser extent

the USA were wrecked and on the verge of bankruptcy. This coupled with impending

unemployment from the soldiers who would return to no jobs, led governments to

seek ways in which they could resuscitate their economies and put them onto the road

to sustainable economic stability. The advanced economic thought of the day was to

implement Keynesian policies, centred on demand management and to attain near full

employment (in the UK from the 1944 Beveridge Report, the target was set at an

average of 3% unemployment). In the period from 1945-1973, the advanced capitalist

economies of Western Europe and the USA experienced unparalleled prosperity,

growth, an expansion to world markets and general economic stability. Record levels

of private and public investment kept unemployment low, and the normally transient

business cycle was tamed.

However during this period however, there were some economists that were sceptical

of Keynesianism such as Phelps and Friedman. In 1973 when the Golden Age began

to wane such as when Stagflation (high inflation and high unemployment) began to

kick in, and with no input from the Keynesians, its authority in fiscal macroeconomics

was coming to an end. This essay shall explain the various factors that contributed to

the demise of Keynesianism in the 1970s.

Popular opinion between governments was the implementing of Keynesianism to

‘fine tune’ and stabilise the economy. Thus to ensure stability, ‘stop go’ policies such

that if the economy grew too fast, fiscal tools such as increasing taxes would be used

to cool the economy down, and vice versa. Another factor that led to Keynesianisms

unexpected demise was the passion of governments to run counter cyclical budgets

opposed to perennial fiscal prudence. Most European...