In the 1930’s,at the height of the Great Depression, the king of England cancelled the purchase of another royal yacht as a gesture of sympathy towards his suffering subjects. Cambridge economist John Maynard Keynes declared on radio the king was misguided and instead of cancelling the order should in fact order an extra one. He believed these orders would increase employment directly in the British shipyards and also in the areas that serviced the yards(multiplier effect). Keynes published his ideas on how to push an economy out of depression in his most famous book, “The general Theory of Employment,Interest and Money”.
His belief of cutting taxes and increasing government expenditure(fiscal policy) with a strong multiplier effect kicking in,was employed by many states between the 1940’s up to the early 1980’s.
The Keynesian revolution was strongly challenged in the 1970’s when the major economies took a preference for market led economics,as forwarded by Milton Friedman. Less government interference,privitisation of state assets,self regulation, and the market deciding what goods and services to be produced became the order of the day. This trend has come to sudden halt!
Gordon Brown,through his chancellor has announced a return to Keynesian economics. Taxes in the UK are to be reduced to provide a £20bn stimulus to the economy. Barack Obama has pledged the biggest state spending in the U.S. since President Eisenhower built the interstate system in the late 1950’s. His plans include major expenditure on highways,bridges,school repairs and will safeguard/ create 2.5m jobs in the next 2 years. As the U.S. is a closed economy the multiplier effect ought be strong,thus helping income levels throughout the economy.
Keynesian thinking was used in the Irish economy in the late 1970’s with disastrous results. As an open economy,much of the extra expenditure generated by reducing taxes and increasing government expenditure found its way into expenditure on imported goods. Irish consumers buying Japanese cars and German household durables did little for the Irish economy,except create balance of payments problems and a serious national debt.
The Irish government however has recently announced a programme for economic recovery,”Building Ireland’s Smart Economy: A Framework for Sustainable Economic Recovery”which contains a multi-billion package of tax incentives and spending measures designed to promote economic activity. Notwithstanding this initiative, it looks like our best hope is on Keynes providing solutions for the larger economies and that we can avail of opportunities within those markets to sell our goods.