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By Kent Matthews (auth.)

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The problem, as suggested in the previous chapter, was that it was not at all clear whether the situation was the result of demand management policy or despite it. Even to the contemporary policy-maker, the period was one of limited success. The UK was too often unfavourably compared with the rest of Europe, the course of the economy was frequently interrupted by balance of payments crises, fears of inflation and by the end of the period, even a deterioration in the unemployment position. The recurrence of the balance of payments problems constrained domestic demand policies, resulting in the 'stop-go' cycle.

The Classical argument was that a reduction in the price level following a deflationary policy would produce wage cuts of similar size. This was expected to improve the liquidity of firms, which would encourage investment, thus maintaining the level of demand at full employment. Keynes's first criticism was that wages would not respond in the way envisaged by the Classicals. Second, even if wages did respond, interest rates would have to fall to stimulate the investment that would offset the decline in demand and the collapse in business confidence.

It was widely believed that the main outcome of the Keynesian revolution was the final banishing of the problem of unemployment. The 1950s and most of the 1960s saw the lowest unemployment rates recorded in the history of the UK. Unemployment was usually less than 2 per cent of the labour force. 7 per cent. 5 per cent. 1 details the three main indicators from 1950 to 1973. This was a period of new promises and fresh hopes. The 1944 White Paper on Employment Policy committed the government to 'the maintenance of a high and stable level of employment'.

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