The outlines of a keynesian solution

In this chapter we address ourselves to the implications of alternative economic policies. Specifically we ask the question: suppose we accept a simple Keynesian theory of the determination of employment, how much difference would such policy choices have made? Developing such alternative scenarios or ‘counterfactuals’ is now a widely accepted approach to economic history but has its drawbacks in that it depends on identifying and measuring key economic relationships. The more plausible the assumptions, the more believable the argument which follows from them. In this respect, two important qualifications must be born in mind throughout. First we are characterizing the economy in a manner which gained widespread acceptance following Keynes’s General Theory [157]. Noteveryone would agree that such an approach with its central focus on aggregate demand is appropriate, even for the time when the General Theory was being developed. We pay some attention to possible limitations of the Keynesian approach at the end of this chapter and a discussion of the supply-side approach has been given by Capie in Chapter 5. Second, even within the Keynesian tradition there is no unanimity on the magnitude of certain effects which are important for this framework of analysis. For both these reasons,the results of simple Keynesian calculations must be regarded as suggestive rather than definitive.