1. There is no natural tendency for capitalist market economies to correct economic shocks and maintain an equilibrium at full employment. There was a regular pattern of boom and slump but it was assumed that economies quickly righted themselves without government intervention. Keynes denied this.

2. It followed from 1 that capitalist economies would commonly experience general unemployment and that there would be no self generating economic forces to quickly correct the situation. So Keynes questioned the then prevailing views about the nature and cause of unemployment. He made a crucial distinction between what he called involuntary unemployment and voluntary unemployment. This distinction was one of the most controversial elements in Keynes’s economics; disputed then and ever since. Involuntary unemployed were those seeking work at the going wage rate but unable to find it. Previously, economists had tended to argue that unemployment was due to rigidities in labour markets caused by factors like excessive wage claims, trade union activities and unemployment pay. Voluntarily unemployed workers who were, it was assumed, the majority of the unemployed, were those workers who chose not to work at the existing wage rates.

3. According to Keynes this failure to maintain the workforce in full employment was due to a lack of total spending. The pre-Keynesian idea was that unemployment was largely due to wage rigidities.

4. These total spending failures were mainly due to a shortfall in investment. Business decision-takers were prone to swings of irrational optimism and pessimism about future profitability and this affected their investment plans. Adverse expectations would lead to a fall in investment expenditure, hence a fall in demand, output and employment and thus a rise in unemployment. These effects would be made worse through the fall in household incomes and the consequent reduction in household purchases.

5. From this diagnosis it followed that governments had a crucial role to play by economic stabilisation policies. A shortfall of demand required government action to offset it. This could be either by using fiscal policies (taxation), increased government expenditure and/or tax reductions, or via monetary policy by lowering interest rates or increasing the money supply. (Keynes himself, however, was rather doubtful about the effectiveness of monetary policy.)

6. Politically, Keynesianism seemed to imply a large government sector as a necessary adjunct to rational macroeconomic stabilisation policy.

Keynesianism, both as a theoretical doctrine and as actual economic policy, had greatest influence (in the non-Communist world) after 1945 and remained the dominant influence until the late 1960s. In the 1960s several events seemed to cast doubt on the practical validity of Keynesiansim and, at the same time, its theoretical underpinnings were being questioned. The main attack came from monetarism, a doctrine spearheaded by Milton Friedman and fellow members of the Chicago School.

Monetarism, like Keynesianism, has both a political policy aspect to it and a theoretical underpinning. Although there is considerable diversity within its camp, monetarism may be summarised in the following propositions:

1. Money plays a crucial role in any economy. In the short run fluctuations in the supply of money can have effects on output and employment but in the long run changes in the supply only affect the general level of prices; that is, the inflation rate. In the famous words of Milton Friedman ‘Inflation is always and everywhere a monetary phenomenon.’

2. Monetary policy could not be left to the discretion of central bankers or governments but should follow rules which laid down in advance the annual increase in the money supply. Thus, if zero inflation was the desired goal the money supply should only increase by the increase in annual productivty.

3. Demand management as advocated by the Keynesians could do little to improve output or the standard of living. These depended much more on supply side factors. Hence, monetarism is associated with what is termed supply side economics.

4. Supply factors included improving the working of labour markets (by reducing the power of trade unions and increasing work incentives) increasing productivity and efficiency by greater competition in markets - hence privatisation.

In the UK these policies were begun in the Thatcher years (1979 onwards) and have been continued since. It should be noted though that although the main target of macroeconomic policy has been the rate of inflation rather than the volume of output and the level of unemployment, the monetarist emphasis on the supply of money has been replaced by the use of interest rates to control inflation. So, in a sense, current macroeconomic policy combines elements of both Keynesian and monetarist thinking, but with a clear emphasis on the importance of supply side factors.