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Study Cards on economic, inflation, policies

What is the central issue in economic policy?

The proper balance between politics and economics, and thus between the state and the market.

"Does a capitalist economy work best when it is left alone by government, or can stable growth and prosperity be achieved only through a system of economic management?"
How can this question be answered?

Through an evaluation of two rival economic strategies: Keynesianism (policy of economic management, associated with regulating aggregate demand to achieve full employment) and neoliberalism

Why was the credibility of Keynesianism damaged?

By the emergence of the 1970s stagflation (combination of economic stagnation, reflected in high or rising unemployment, and increase in inflation); theory could not explain this.

Keynes' ideas were undermined by their association with the 'tax and spend' policies that might have sapped enterprise and initiative, and undermined growth by creating permanently high inflation.

How has the rise of neoliberalism signalled a shift from government intervention and towards free market?

With Raeganism (USA) and Thatcherism (UK), attempts were made to roll back the frontiers of the state and release 'the natural dynamism of the market'.

Neoliberalism therefore amounts to a form of market fundamentalism (absolute faith in the market to provide solutions to all economic and social problems).

How did neoliberals thought to achieve full employment?

Ensuring 'sound money', by achieving low or zero inflation.

Keynesian policies are designed to boost output and reduce unemployment, which merely fuel inflation by encouraging governments to borrow (print money).

Alternative: shift away from demand-side policies that encourage consumers to consume, and towards supply-side policies that encourage producers to produce. This invariably means deregulation and tax cuts.