Macroeconomic Policy

In the course of this chapter many of the threads which run through earlier chapters will be pulled together with a view to explaining the evolution of macroeconomic policy in the UK. The purpose is both to examine the theoretical models which at various times have been adhered to with varying degrees of conviction by UK governments, and also to examine the empirical assessments of the results of using these models. This chapter necessarily contains a more wide-ranging historical perspective than most others, but in common with them it concentrates upon the evolution of theory and practice over the past two decades. In setting this discussion at the end of the book, rather than at the beginning, as is commonly the case in other texts, the problem of introducing many matters as yet unfamiliar to some readers (such as the exchange rate) is avoided. To retain the continuity of the narrative it is assumed that the reader has indeed read the previous chapters, but where necessary he or she is referred back to the discussion earlier in the book. Thus there is, for example, no attempt to replicate the discussion of supply-side economics in Chapter 3, but models such as new classical macroeconomics, which were mentioned only briefly in Chapter 1, are spelled out in more detail. However, it is necessary to emphasise that in reality policy cannot be compartmentalised in this way. It is impossible to separate a government’s demand management and supply-side policy. Indeed, the belief that this was possible was probably one of the major flaws in the Keynesian consensus of the 1950s.