Returning To Full Employment The Keynesian Way

01 Jan 1998

A wide range of demand and supply-side policies are needed to return to full employment, according to Professors Philip Arestis and Malcolm Sawyer, writing in the latest issue of the Economic Journal. The economic policies they propose are based on two fundamental Keynesian insights: the vital role of aggregate demand in setting the level of economic activity; and the absence of automatic forces leading a market economy to full employment. What''s more, the recommended policies are rooted in the view that a less unequal distribution of market power, income and wealth is a desirable goal in its own right and a vehicle for increasing general prosperity.


Arestis and Sawyer note that a laissez-faire market economy will not usually generate full employment. The obstacles to the achievement of full employment are not ''imperfections'' like monopolies and oligopolies or trade union activity, which might be removed through government action to create ''flexible markets''. Rather, they are that a laissez-faire market economy exhibits elements of instability and does not usually generate a level of aggregate demand consistent with full employment.


But while a high level of aggregate demand is a necessary condition for the achievement of high levels of economic activity and employment, it is not sufficient. Full employment requires that some key constraints are tackled. There are economic, social and political forces that generate disparities and inequalities between individuals, regions and countries:
• There is likely to be an unsustainable foreign trade deficit at full employment.
• Shortages of productive capacity can prevent the full employment of labour, and perhaps as a consequence, expansions of aggregate demand may be inflationary.
• A move towards full employment is likely to involve some inflationary pressures, and a fear of inflation may cut short any expansion through political pressures to deflate.
• Sustained full employment may have adverse effects on productivity in economies that rely on competition and the threat of unemployment to underpin work effort.


Appropriate economic policies are necessary to achieve and maintain full employment. The increased power of trade unions and workers at full employment along with the resulting inflationary pressures must be addressed. Social consensus on the distribution of income along with wage and price-setting mechanisms that are ''friendly'' to low inflation are required components of the supply-side policies.


Policies to enhance the supply side of the economy, notably industrial policy, can help to alleviate balance of trade deficits near full employment. Even with sufficient demand, full employment might still be difficult, if not impossible, to maintain, if there is inadequate or unbalanced supply potential.


Ultimately, a commitment to promoting a stable environment for the private sector to enable it to reduce speculation and liquidity preference and thus interest rates, is required. This would encourage private sector investment. Strong international institutions would be needed to promote this on a global scale, and thus overcome the problems arising from globalisation.


''Keynesian Economic Policies for the New Millennium'' by Philip Arestis and Malcolm Sawyer is published in the Policy Forum section of the January 1998 issue of the Economic Journal. Arestis is Professor of Economics at the University of East London; Sawyer is Professor of Economics at the University of Leeds.

Philip Arestis

University of Cambridge | pa267@cam.ac.uk

Malcolm Sawyer

0113-233- 4484 | mcs@lubs.leeds.ac.uk