THE IMPLICATIONS OF THE ANALYSIS FOR ECONOMIC POLICY

Keynes's work had clearly assaulted the main props to confidence in the usual instruments of economic policy. The major policy weapon in the orthodox arsenal - i.e. monetary controls - could now be seen to be too blunt to be fully effective.

But this was not the only point at which reliance on monetary policy less important was the Keynesian argument that highly volatile expectation have a forceful bearing on decisions to invest. Indeed, reductions in the rat

desirable as stimulants to investment, might be more than offset by increasing bearishness within the business community.

If full employment and economic stability were to be achieved, it was imperative to assign a much more active role to fiscal policy. By contrast with orthodox views holding that governments should operate with balanced budgets, Keynes called for deliberate deficits to swell aggregate demand. He recognized, however, that public expenditure financed by borrowing would have favourable effects on total demand only to the extent that a net increase in total spending was thereby accomplished. Should projects launched by governments merely displace those that would otherwise have been undertaken by the private sector, the intended growth in total spending would not be realized. Moreover, he was also cognizant of the political resistance his recommendations were likely to encounter. Some types of non-conventional measures might be more acceptable, though less beneficial to society, than others - a consideration which brought out the puckish quality in his style:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering the leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.15

Keynes called for a re-thinking of the instruments of economic policy and for the rejection of the policy prescriptions associated with neo-classical analysis.

The results of a programme of wage reduction would, of course, be happier if real wages did not fall - i.e. if output prices fell by at least as much as money wages. But this outcome was doubtful in view of the substantial market power exercised by many businessmen and their reluctance to reduce prices in face of declining demand. But even if the economic system approximated to perfect competition more closely than was in fact the case, price reductions might still have unfortunate consequences. Price cutting was likely to have depressing effects on expectations and would increase the real burden of outstanding debt. Investment on the scale required to restore full employment might thus be discouraged.

10.