Robin C. Matthews - Why Has Britain Had Full Employment Since the War?

Embed Doc
Copy Link
Readcast
Collections

CommentGo Back

Download

THE ECONOMIC JOURNAL

SEPTEMBER

1968

WHY HAS BRITAIN HAD FULL EMPLOYMENTSINCE THE WAR?i

IF

one were asked to pick out the most important single respect in whichthe experience of the British economy in the post-war period has differedfrom that of earlier times, most people would agree in saying " full employ-ment of labour." There are other notable distinguishing features of thepost-war period—chronically rising prices; an abnormally high ratio ofdomestic investment to income by historical standards; rapid growth ofincome per head—but full employment is the most striking and mostpervasive in its effects.I am not here concerned with the question whether employment hasbeen full in some absolute sense, or over-full, or rather less than full. Thequestion I shall discuss is why employment has been so much more full, ormore nearly full, than it was in the past.That it has been is not open to doubt, even when all due allowance ismade for imperfections in the statistics. The unemployment percentage hasaveraged about 1-8% in the post-war period; in the inter-war period, ifthe figures are adjusted to a comparable basis, it averaged about 10^%;before 1914 the statistics show an average of about 4f %—not nearly so highas in the inter-war period, but still substantially above what we have hadsince the Second World War.^When the question is asked,

why

have we had full employment since thewar? most people tend to reply, without thinking very much, that it isbecause we have had a full-employment policy—we have had the Keynesian

• A revised version of a University of London Special Lecture delivered at University CollegeLondon on February 1, 1968. I am much indebted to Moses Abramovitz for helpful criticisms ofthe original text; to G. H. Feinstein and J. C. Odling-Smee, my collaborators on a forthcoming studyon Growth in the British Economy, sponsored by the Social Science Research Gouncil (New York),for access to unpublished material; and to Mrs. P. Yudkin for research assistance.

^

The official unemployment percentages for the inter-war period need to be adjusted downwardsto make them comparable with post-war figures on account of differences in coverage. The reli-ability and comparability of the pre-1914 figures are doubtful, as is well known, but when accountis taken of offsetting biases it is unclear whether they need to be adjusted upwards or downwards.The evidence

is

surveyed by

W.

Galenson and A. Zellner, " International Gomparison of Unemploy-ment Rates," Appendix J, in Universities—^National Bureau,

The

Behaviour

and

Measurement

of

Unemptoyment

(1957).

No.

311—VOL. LXXVIII. NN

556 THE ECONOMIC JOURNAL [SEPT.

revolution. Now supposing this were the right answer, it would be aremarkable thing. It would mean that the most important single featureof the post-war British economy has been due to an advance in economictheory. It would be a most striking vindication of Keynes' celebrateddictum about the ultimate primacy of abstract thought in the world ofaffairs.However, this interpretation of events, at least in its simple form, isopen to serious objections.The figures just quoted suggest that the inter-war unemployment problemwas of a different order from the pre-1914 unemployment problem. I shalltherefore deal separately with the comparison of the post-war period withthe inter-war period and the comparison of the post-war period with thelonger sweep of British economic development. I shall put forward twopropositions. The first is that as compared with the inter-war period therehas certainly been an increase in effective demand, in the Keynesian sense,relative to supply; but that it is non-proven that this has been due to govern-ment policy, at least in any simple sense. The second is that the declinein unemployment as compared with before 1914 is to a large extent not aKeynesian phenomenon at all.First, then, the comparison with the inter-war period. Throughout thewhole ofthe inter-war period after 1920 there was clearly Keynesian demanddeficiency. Certain bottlenecks were encountered in the late 1930s, chieflyin the industries affected by rearmament, but not to such an extent as toinvalidate the proposition that a substantial increase in output could havebeen brought about by a general increase in demand.Why did this deficiency of demand disappear in the post-war period

?

In particular, was it due to government action

?

The question at issue hereis not whether the Government was or was not pledged in the post-war periodto the policy of maintaining full employment or something near to it—ofcourse it was. The question is whether the high level of demand thatactually occurred was due to government action or whether it was due toother forces, as a result of which government action was not needed.The hypothesis that the change was due to fiscal policy is open to a simplebasic objection. This is that throughout the post-war period the Govern-ment, so far from injecting demand into the system, has persistently had alarge current account surplus. This surplus has varied in amount; butgovernment saving has averaged about

3

% of the national income. This ismuch larger than at any previous time in the twentieth century. Fiscalpolicy as such therefore appears on the face of it to have been deflationaryin the post-war period, quite strongly deflationary in fact, rather than thereverse.This is not to deny that in various post-war years fiscal policy has beenadjusted with the object of increasing demand above its existing level. Butin the years when this was done it was a matter of reducing the size of the

1968] WHY HAS BRITAIN HAD FULL EMPLOYMENT SINCE THE WAR? 557

surplus rather than turning it into a deficit. The overall effect has thereforebeen one of restraint.There are a couple of ways in which the argument can be refined in anattempt to avoid the prima facie conclusion that fiscal policy was in netmore deflationary than in earlier periods.In the first place, compared with before the war, there has been anincrease in the levels of both government expenditure and revenue relativeto national income, as well as a rise in revenue relative to expenditure.Therefore there may have been some inflationary effect of the type analysedin the theory of the balanced budget multiplier: that is to say, the extrataxation may have been partly at the expense of private saving. It isdifficult to estimate the magnitude of this effect, because our understandingof what determines private saving is very inadequate. As an example onecan assume that private saving varies proportionately with private disposableincome, other things equal. One can estimate the net effect of fiscal policy,including both the effect of the balanced budget multiplier and that of thebudget surplus, by asking what would have been the effect on the level ofdemand in 1937 (the last pre-war cyclical peak) if government expenditure,direct taxes and indirect taxes in 1937 had all borne the same ratio to nationalincome as they did in 1964 (the last post-war cyclical peak), on the assump-tion that exports, investment and the propensities to save and to importhad remained unchanged. It comes out from this calculation that incomein 1937 would in that case have been

1

% lower than it actually was. Thatis to say, the balanced-budget multiplier effect is less than sufficient to out-weigh the budget surplus effect. Alternative assumptions are possible, somepushing the result one way, some the other; but it does not seem possible,even on the most favourable assumptions, to get more than a mild overallnet stimulus—certainly not enough to explain the magnitude of the increasein activity that actually occurred. So while the balanced budget multiplierpoint has to be acknowledged as valid in principle, it does not appear toalter the argument qualitatively. More exact research on this must awaita better understanding of the saving function.The second possible refinement ofthe argument is a point that has comeup in recent discussions of fiscal policy in the United States.^ Granted thatthere was a budget deficit in 1937 and a budget surplus in all post-war years,this is to some extent the

result

of the differences in the level of activity; fora high level of activity raises tax revenues. It could conceivably be arguedthat the level of government expenditure and tax rates prevailing in 1937would at a full-employment level of activity have produced an even largersurplus than there was in the post-war period, and that fiscal changes weretherefore in net inflationary. This is scarcely tenable statistically. Butsupposing it were true—or that it were true when taken in conjunction

* A very explicit earlier discussion is in N. Kaldor's Appendix G to W. H. Beveridge,

Full

Employment in a

Free Society

(1944).

of 00

Leave a Comment