The Objectives of Macro-Economic Policy PDF
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THE OBJECTIVES OF MACRO-ECONOMIC POLICY The Objectives of Macro-Economic Policy Ajit K. Dasgupta Professor of Economics Sir George Williams University, Montreal A. J. Hagger Reader in Economics University of Tasmania Palgrave Macmillan © Ajit K. Dasgupta and A. J. Hagger 1971 Softcover reprint of the hardcover 1st edition 1971 978-0-333-12396-6 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published 1971 by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Toronto Dublin Melbourne Johannesburg and Madras SBN 333 12396 4 ISBN 978-1-349-01149-0 ISBN 978-1-349-01147-6 (eBook) DOI 10.1007/978-1-349-01147-6 Contents Preface vii Part One: Introduction 1 Macro-Economic Policy Objectives 3 Part Two: Internal Balance and External Balance 2 The Consumption Function 37 3 The External Relationships 68 4 The Fixed-capital and Housing Investment Functions 89 5 Inventory Investment 116 6 Stabilisation Policy: The Pursuit of Internal Balance 146 7 Balance of Payments Policy: The Pursuit of External 221 Balance Part Three: Price Stability and Economic Growth 8 The Inflationary Process: The Market-clearing Approach 275 9 The Inflationary Process: The Administered-pricing 287 Approach 10 Anti-inflation Policy: The Pursuit of Price Stability 324 11 Optimum Economic Growth 364 12 Growth Policy: The Pursuit of a High Growth Rate 426 Part Four: Interrelationships between Objectives 13 Internal Balance and Price Stability 449 14 Internal Balance and External Balance 481 15 Economic Growth and Price Stability 499 List of Main Symbols 516 Index of Subjects 519 Index of Authors 528 Preface THIS book is a fairly advanced text in macro-economics written for graduate and final-year undergraduate students. It differs from the general run of advanced texts in this field in a number of ways. In the first place, it has a strong British emphasis: British institutions provide the framework, the problems selected for discussion are British problems, and British empirical research is drawn on wherever possible. Secondly, it is not a book on macro-economic theory as such. Our central themes are the four great objectives of macro-economic policy - internal balance, external balance, price stability and rapid growth - the measures by which they can be promoted and the possible conflicts between them. A rigorous discussion along these lines requires that the reader possess a fairly sophisticated theoretical equipment, and this we have attempted to provide in the course of the book. But we have not gone beyond this. Thus, while the theo retical content of the book is substantial, it is also deliberately cir cumscribed. For a comprehensive treatment of macro-economic theory, the student would need to go elsewhere-toR. G. D. Allen's Macro-economic Theory, for example. We would justify this approach to the presentation of theory by arguing that most students are un willing to invest heavily in the acquisition of advanced theoretical tools unless they can see clearly that these tools are indispensable to a proper understanding of the great questions of the day. Finally, the book has, we hope, a strong empirical flavour. Once again, however, we have made no attempt to be comprehensive. In line with our desire to cater primarily for the needs of British students we have confined our attention to relevant British empirical material, with one or two notable exceptions such as the recent important empirical studies of Jorgenson for the United States. In short, what we have tried to do is to produce an advanced text in which theoretical, policy and empirical discussions of a macro kind are woven together as tightly as possible within the context of the British economy and British economic institutions. viii PREFACE Inevitably, we have been compelled to make extensive use of notation. We have tried to make this as simple as possible and to avoid double use of symbols wherever confusion appeared likely to result. Nothing is more irritating and distracting than to have to hunt back through several chapters to find the meaning of some symbol, and to minimise the need for this we have adopted the practice of writing key variables in full at fairly regular intervals and inserted a comprehensive list of symbols at the end of the book. A short reading list has been appended to each chapter. In each case the references which appear have been chosen not only because of their intrinsic worth but also because, by consulting them, the student will find it comparatively easy to build up a substantial biblio graphy if he wishes to do so. The book developed from an earlier work by one of us1 and was substantially written in 1967 while we were working in the Economics Department of the University of Southampton. We were greatly helped by discussions with various members of the Department and we are grateful to them for their assistance. In particular, we are deeply indebted to Mr A. P. Budd who read the manuscript as it developed and suggested many major improvements. We also wish to thank Mrs S. M. Payne and Mr P. J. Rayner of the Economics Department of the University of Tasmania, both of whom worked through large sections of the manuscript and helped to eliminate much error and confusion. The index was prepared by Mr D. W. Challen of the University of Tasmania and our thanks are due to him for his painstaking efforts. Finally we must thank Miss P. Schmidt for her outstanding typing of an extremely difficult manu script. A.K.D. A.J.H. Sir George Williams University, Canada, University of Tasmania, Australia 1970. 1 A. J. Hagger, Price Stability, Growth and Balance (Melbourne: Cheshire, 1968). PART ONE Introduction A2 1 Macro-Economic Policy Objectives 1.1 Britain's Economic Objectives The last thirty years have seen a profoundly significant change in the list of agreed macro-economic objectives. Writing in 1931, the Macmillan Committee gave pride of place in their discussion of objectives to the desirability of raising, and then stabilising, the world prices of basic raw materials and foodstuffs, though it recognised that this was as much a matter for international, as for national, action. In the words of the report: Thus our objective should be, so far as it lies within the power of this country to influence the international price level, first of all to raise prices a long way above the present level and then to maintain them at the level thus reached with as much stability as can be managed. We recommend that this objective be accepted as the guiding aim of the monetary policy of this country ....1 True, other objectives were mentioned in the report, but without elaboration, without emphasis and without conviction. Thus para graph 280 contained a parenthetical list of monetary policy objectives (' ... - for example, the maintenance of the parity of the foreign exchanges without unnecessary disturbance to domestic business, the avoidance of the Credit Cycle, and the stability of the price level - . . .'), and paragraph 282 referred in a single sentence to the need to 'promote the stability of output and of employment at a high level'. The adequacy of the approach embodied in the Macmillan Report was increasingly called in question throughout the late 1930s and the early 1940s, mainly as a result of the experience of the Great Depres sion and the widespread acceptance of the ideas put forward by 1 Report of Committee on Finance and Industry, Cmd 3897 (June 1931) p. 117, paras 275-6. 4 INTRODUCTION Keynes in The General Theory; and the culmination of this growing dissatisfaction was the publication in 1944 of a path-breaking White Paper.1 The somewhat bold opening sentences of the Foreword to this paper showed how far the generally accepted view had moved since 1931: 'The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war. This paper outlines the policy which they propose to follow in pursuit of that aim.' Thus, the maintenance of a high and stable level of employment had now become a 'primary aim' of government. Moreover it was now generally recognised as an aim which had to be consciously pursued through appropriate government policies. The same points were stated with greater emphasis in the body of the paper. For example, after presenting unemployment rates for the period 1858-1938, the paper added: 'If these features which have afflicted our economic life in the past are to be banished, as it is our resolve to banish them, from the future ... .'2 Again : The Government are prepared to accept in future the responsi bility for taking action at the earliest possible stage to arrest a threatened slump. This involves a new approach and a new responsibility for the State. It was at one time believed that every trade depression would automatically bring its own corrective .... Experience has shown, however, that under modern conditions this process of self-recovery, if effective at all, is likely to be extremely prolonged and to be accompanied by widespread distress, particularly in a complex industrial society like our own. 3 All this appears little short of revolutionary when read in conjunc tion with the Macmillan Report. The 'maintenance of a high and stable level of employment' has retained the central position among policy objectives, to which it was elevated by the 1944 White Paper, throughout the entire post-war period, and there can be no doubt that it will continue to do so for a long time to come. Nevertheless other objectives have emerged alongside the employment objective (to some extent because of the success of post·war employment policy) and have been given increas ing emphasis in recent years. By the end of the 1950s these newer objectives had gained sufficiently wide acceptance for the Radcliffe Committee to be able to list them, along with the employment 1 See Employment Policy, Cmd 6527 (May 1944). 2 Ibid., p. 15. 3 Ibid., p. 16.
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