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Introduction
Whether Keynesian-Based Ideas are applicable to rescue and recover the current UK economy is of hot topic recently. The debate arises out of the Keynesian supporters and dis-supporters with the concentration of how to make the best movement for the development of UK economy. The aim of this paper is to discuss the applicability of the Keynesian-based ideas within the context of the UK economy. With such purpose, both Keynesian-based ideas and some relevant alternative approaches will be reviewed in the paper regarding the balance of payments. Keynesian based ideas are an economic theory in relations to the economic environment, as well as the measures of dealing with microeconomic environment conducted by the governments. In contrast, there are another two main alternative approaches, which are the Gold Standard theory and Bretton Woods system will be introduced and discussed in this paper. It will concentrate on their individual contributions for the governments to maintain the balance of payments. At the end of this paper, it will discuss the possibility of the implementation of the Keynesian theory to the current UK economy.
Keynesian-Based Ideas
Keynesian Theory, is created by John Maynard Keynes in 20th-century. It is a theory in relations to the microeconomic environment, which claims that the economies of private aspects may probably affect the macroeconomic outcomes. In this case, it advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle (Sullivan & Sheffrin, 2003). Keynesian theory dose not only require dealing with the economies of the private sector, but also need the government to create policies for serving the public sector economies.
When it comes to the balance of payment, Keynesian theory would exacerbate the underlying problem: following either policy as well as raising saving (broadly defined) and thus lower the demand for both products and labor (Donald, 2006). It is argued that insufficient buying-power may lead to depression of the macroeconomy. The theory suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong so that it argues that the government should adopt fiscal policies, that is policies which acted against the deficit spending when a nation's economy suffers from recession or when unemployment is persistently high (Traill, 2008). It means that when the macroeconomic environment changes, the government should create policies to solve the improper situation more positively.
Although the Keynesian Theory is not the same as the traditional theories, which suggest that deficit spending could actuate production. However, the Keynesian theory claims that the deficit spending would cause negative influence to the private investment of the economy. It is because the deficit spending would increase the demand for labor and raise wages, and thus decrease the profitability. After that, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment (Blinder, 2002).One of the factors that considered as important factor to the Keynesian theory is that classical and neoclassical theory does not explain the reason why firms’ actions would influence government policy, which are assumed to produce a negative outcome, while those same firms acting with the same motivations outside of the government are supposed to produce positive outcomes.
Therefore, the key that indicated in Keynesian theory is the counter-cyclical policies, which are expected to lower down the fluctuations of the economy. Make the taxation policies as an example, traditional theories suggest that that one should cut taxes when there are budget surpluses, and cut spending during economic downturns because it would increase the taxes (Blinder, 2002). In contrast, the in Keynesian theory, it is better to raise taxes with the purpose of speeding down economy and preventing inflation when there is abundant demand-side growth. Moreover, engaging in deficit spending is also considered to be helpful for stimulating employment and stabilize wages during economic downturns. The key of the balance of payment held by Keynesian theory holders is to create profits and incomes to the theories of studying economies, because it links directly to the analysis of taxes, economic environment and their effects on the fiscal policies of the governments.
Alternative Approaches
Apart from the Keynesian Theory, there are some other theories analyzing the balance of payments of the governments. Among them, two theories are considered to be important because of their influences to the economic systems of the world. One of the theories is Gold Standard theory.
The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold (Franklin, 2000). It is also an opposite concept of commodity money system. Gold was a common form of money due to its rarity, durability, divisibility, fungibility, and ease of identification (Officer, 2007). Compared to currencies, which is just paper and so has no intrinsic value, although they are accepted by traders because it can be redeemed any time for the equivalent specie, gold standard system could create a more reliably system for the governments, which will also be helpful for the government to control the values of their currencies. Moreover, the histories suggest that gold standard system, along with the paper money, plays an important role in preventing the country and monetary system from depression and corruptions.
Another important monetary system is the Bretton Woods system which also plays an important role in the development of monetary system. The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century.
One of the most important responsibilities of the Bretton Woods system is to advocate each country to adopt a monetary policy that could maintain the exchange rate of its currency within a fixed value in terms of gold, which replaced by U.S. dollar as the standard of evaluation later at 1970s (Thompson & Hickson, 2001). In the Bretton Woods system, gold convertibility enforcement is only considered to be necessary part of the government’s currency policies. However, it is necessary for the government to create an open market for gold and maintaining its operations as a free market to maintain the value of the monetary system. It is a system built based on the stability of the value of dollars. In this case, the strike of Financial Crisis turns the Bretton Woods system supporters that basing the entire monetary system on an individual currency could not guarantee the safety of the system, which lead them to alter the standards of the Bretton Woods system (Harold 1996). Nevertheless, it is considered that creating fundamental currency standard is necessary for the macroeconomic environment. In stead of relying on the value of dollar solely, the system supporters consider that it is necessary to establish a more complex system that more than one kind of currency should comprehensively play the role as the fundamental currency of the Bretton Woods system, so that it could guarantee the balance of currency market for the governments.
Applicability of Keynesian-Based Ideas to current UK economy
This Keynesian became accepted as commonplace to the point of banality, and subsequently was dismissed as irrelevant or dangerous. First, although the Keynesian framework is a useful way of thinking about all economic conditions, it is both valid and truly radical only in depression conditions. Second, the Keynesians went too far. Keynes’ treatment of inflation was sketchy at best. In the Great Depression, inflation was scarcely public enemy number one. But the Keynesians took this a stage further. Some said inflation did not matter. Others felt that even though it did matter they would be able to control it through prices and incomes policies (Traill, 2008). The result was that under Keynesian management the economy was operated at too a high a level of aggregate demand for too long and inflation was let loose.
They also underplayed the role of monetary factors, in stark contrast to the work of the master himself, much of whose writing concerned them. And they underplayed the adverse long-run consequences of public deficits. Advocacy of public borrowing to help get an economy out of depression became a relaxed attitude to public deficits in general. They also overestimated the state’s ability successfully to manage aggregate demand, believing they would be able to fine-tune the economy. In the event, our poor ability to forecast, and the unpredictable nature of policy changes, meant that often actions designed to stabilize the economy in fact destabilized it.
For the free markets and the free society, it is no problem to see this as no different from believing that, even though markets perform most roles better than any of the alternatives, there are some areas, such as defense or public health, where only collective action organized by the state can adequately provide. What are the implications? There is nothing anti-Keynesian about trying to get out of the current position through lower interest rates. For the person who believes in markets and is wary about state action, this must be the first resort. But don’t be surprised if this does not work. In that instance, it is necessary to allow huge increases in government borrowing to stave off depression. Finance need not be confused with economics. Debt has to be serviced all right, and this has costs, but idle men and machines are real costs which are never recoverable and hence are borne forever.
In depression conditions, the Victorian approach to finance is wrong and the Keynesian approach is right (Donald, 2006). The economy has just been through a period when the Keynesian approach was often derided. It was widely believed that the finances of the collective could be regarded like the finances of an individual household. This will bring two huge problems for our politicians and policy-makers to address. First, what is the most effective, and least inefficient, way of employing the Keynesian remedy? Second, when depression conditions have passed, as eventually they will, how can we successfully put the great man back in his box, and trim back the pump-priming role of the state? What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment. And yet the real lesson of the U.K. in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more.
Conclusion
To sum up, Keynesian theory dose not only require dealing with the economies of the private sector, but also need the government to create policies for serving the public sector economies. To balance the payment, it would exacerbate the underlying problem: following either policy as well as raising saving (broadly defined) and thus lower the demand for both products and labor. Apart from the Keynesian Theory, there are some other theories analyzing the balance of payments of the governments. One of the theories is Gold Standard theory. The histories suggest that gold standard system, along with the paper money, plays an important role in preventing the country and monetary system from depression and corruptions. Another important monetary system is the Bretton Woods system which also plays an important role in the development of monetary system. In stead of relying on the value of dollar solely, the system supporters consider that it is necessary to establish a more complex system that more than one kind of currency should comprehensively play the role as the fundamental currency of the Bretton Woods system, so that it could guarantee the balance of currency market for the governments. At last, Although the Keynesian framework is a useful way of thinking about all economic conditions, it is both valid and truly radical only in depression conditions.
References
Blinder, A. S. (2002), Keynesian conomics. etrieved from:
http://www.econlib.org/library/Enc/KeynesianEconomics.html
Donald, M. (2006), John Maynard Keynes and International Relations: Economic Paths to War and Peace, New York: Oxford University Press,
Franklin, B. R. (2000). The political economy of American industrialization, 1877-1900. Cambridge: Cambridge University Press.
Harold J. (1996) International Monetary Cooperation Since Bretton Woods. New York: Oxford University Press
Officer, L. H. (2007). Between the Dollar-Sterling Gold Points: Exchange Rates, Parity and Market Behavior. Chicago: Cambridge University Press.
Sullivan, A. & Sheffrin, S. M. (2003). Economics: Principles in action. Upper Saddle River: Pearson Prentice Hall.
Traill, R.R. (2008). Problems with Economic Rationalism — Psychology, Green-issues, and Jobs. Melbourne: Ondwelle.
Thompson, E. A.& Hickson, C. R. (2001). Ideology and the evolution of vital institutions: guilds, the gold standard, and modern international cooperation. Boston: Kluwer Acad.