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Investment in Macroeconomics

May 23, 2018
Investment in Macroeconomics

INTRODUCTION

This post will examine the various post WW2 theories on macroeconomic policies in Britain during the 1945 to the 2018 time period. This includes the developing economic theory, policy developments at both a national and international level, and the developments of political ideology and its impact on the economy of the United Kingdom.

The term economics has been added to our lexicon by the likes of Adam Smith, and according to Lionel Ribbons which gave his own definition of economics in 1932, “economics is a science which studies human behaviour as a relationship between ends and scarce means which has alternative uses” (Open Library, 2018). Lionels own definition of economics focus on analytical rather than classificatory, in addition to the focus on a specific element of human behaviour which is scarcity of resources and unlimited wants.

LITERATURE REVIEW

MACRO-ECONOMIC OBJECTIVES

There is widely considered to be four primary objectives for macro-economic objectives, these include:

  1. Full employment
  2. Price stability
  3. A high, but sustainable, rate of economic growth
  4. Maintaining a balance of payments equilibrium

It is the Government in power that holds the responsibility to achieve these aims, but as described below the Bank of England is responsible for monetary and financial stability, but at the behest of Government.

The Bank of England has two primary objectives that complement the four objectives listed above, these include:

  1. Monetary stability
  2. Financial stability

Monetary stability is concerned with inflation, prices and consumer confidence levels in the national denomination of currency, sterling. It s important to note that while it is the central bank that utilizes tools to maintain inflation (usually via interest rates) it is the Chancellor of the Exchequer that provides the target rates, I.e. the Government in power at the time.

Financial stability is concerned with the wider financial and economic systems and markets. The central bank has access to a vast amount of financial information about the various financial institutions such as banks and insurance firms. It is proactive in dealing with uncertainty and risks to the UK economy, and has the power to act in times of crisis. A recent example of this was the bank run of Northern Rock, where the Bank of England stepped in to act as a lender to the troubled bank – reassuring both investors and consumer alike. It is important to note that lending by the Bank of England is not the only tool it utilizes. It is able to enforce reserve requirements, open market operations, direct credit control, prudential guidelines and so on.

Investment in Macroeconomics

THE ECONOMISTS ARESENAL

As partially described above, it is the Government and the Central Bank that holds responsibility for and the tools necessary to maintain the four key objectives. A non-exhaustive list of policy instruments includes:

RESERVE REQUIREMENTS

The central banks ability to adjust reserve requirements. As the Bank of England has the authority to set requirements of other financial institutions, it does this to enforce risk is controlled by way of reserve requirements. As well as creating a buffer of reduced risk, due to the financial institutions availability of liquid capital, the Bank of England can indirectly limit the amount of lending these financial institutions enact to the domestic economy (Glocker & Towbin, 2012).

INTEREST RATES

The Bank of England maintains the ability to lend to institutions such as banks at extremely favorable rates of interest, known in the industry as the minimum rediscount rate. This has a direct impact on the money market and directly affects the level of supply in terms of credit and savings (an additional variable in supply of reserves). As it is easy to deduce, this also has an impact on the investment available for commercial uses, which is a prime variable in terms of employment, productivity and economic growth (Bank of England, 2018).

TAXATION & PUBLIC SPENDING

The central Government has the direct ability to raise, lower, scrap or introduce taxes to the domestic economy. The same applies for public expenditure, it is the Government that dictates the terms, which is generally aligned with the manifesto or mandate the election was fought and won on (Gov.uk, 2018).

THE KEYNESIAN REVOLUTION 1930 – 1950

It is firstly important to consider the economic systems of the 1930s, which provides an insight into how the economic system revolutionized into the one recognizable today. It was the 1930s depression that became the focal point of questioning the neoclassical economics of balanced budgets, open trade and the long running gold standard. It was this collapse that led to professors and industry thinkers such as Keynes to develop what became known as the Keynes theoretical revolution (Robertson, 1936).

A STRENGTHENING OF TIES 1951 – 1970

The period of the 1950s was a time of economic policy changes within the treasury, this is evident with what became known as the Robot proposal – a plan to float sterling and the mass resignations at the treasury department over its defeat for imposing stricter fiscal discipline.

Problems during this time had appeared by the way of inflation, and the continued mounting of data that showed the United Kingdoms relative economic decline through the 1950s. The 1960s saw solutions and corrective measures imposed on the UK economy, including inflation targets. While this event is not considered a significant shift by academics, it is considered to be adjustment of note to the prevailing Keynesian theories of the past.

THE SHIFT TO MONETARISM 1971 – 1990

Halls publication of the shift from Keynesianism to monetarism in the British economy during the 1970s gained widespread traction in academia and was widely discussed. Edward Heaths mandate of lowering taxes, reducing state interference and reforming barriers to industry on the face of it goes against the Keynesian model. While this is true initially, the economic problems of the early 1970s caused a reversal back to the Keynesian model.

AN ECONOMIC SUMMARY VIA DEBT: ANALYSIS

UK National Debt as a percentage of GDP and listed in Figure 1 below. The first area of note is the volatility increase in debt to GDP that occurred between 1936 and 1945, which can be easily explained by World War 2, which at the time wrought a devastating impact on the British economy.

Secondly, since 1945 the UK economy has generally performed exceptionally well in terms of national debt. There has been a net reduction in debt as a % of GDP from ~240% in 1945 to around %40 in 1993. 1993 saw the next financial crisis of recession which explains the rise in debt which continued till around 1997. Since then debt has generally risen, initially due to a loose financial policy by the central governments, and then due to the latest recession around 2007.

This encompasses the recent history of debt since 1945 and provides an insight into the economic events that have affected the decisions of both central banks and governments in recent decades.

In terms of policies and the tools available to control and stabilize the UK economy, this can occur from either the Bank of England, for example, through interest rate changes, or from the Government. An example of this might be an increase in taxes. Both of these are policies by which the central bank has various policies it can utilize in times of uncertainty and financial crisis, or equally in times of high growth and rising inflation. The Bank of England maintains a primary purpose of promoting stability and growth for the wider UK economy. This is an example of a macro-economic objective and is considered an important tool in securing the future prosperity of Britain.

Investment in Macroeconomics

In the latest financial crisis, interest rates were cut from 5% to 0.25% over the course of around two years. This is demonstrative of the economic significance of the latest financial crisis (Bank of England, 2018). The ability to adjust interest rates has been widely adopted by Central Banks around the world and has continued to provide a vital tool in balancing inflation and economic growth, in addition to the case above, of “extraordinary events” such as a financial crisis.

Investment in Macroeconomics

REFERENCES

Answers.com. (2018, 05 08). Microeconomics_and_macroeconomics. Retrieved from answers.com:
http://www.answers.com/Q/What_An_example_of_microeconomics_and_macroeconomics

Bank of England. (2018, 05 08). Official Bank Rate history. Retrieved from Statistical Interactive Database:
http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp

Bank of England. (2018, 05 11). The interest rate. Retrieved from BankofEngland.co.uk:
https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate

Economics Discussion. (2018, 05 08). 1982. Retrieved from http://www.economicsdiscussion.net:
http://www.economicsdiscussion.net/economics-2/nature-of-economics-economics-as-a-science-and-an-art/1982

Glocker, C., & Towbin, P. (2012). Reserve Requirements for Price and Financial Stability: When are they Effective? Banque De France, Vol 8 No 1 19-50.

Gov.uk. (2018, 05 11). How Government Works. Retrieved from gov.uk:
https://www.gov.uk/government/how-government-works

ONS. (2018, 05 08). Inlfation and Price Indicies. Retrieved from ons.gov.uk:
https://www.ons.gov.uk/economy/inflationandpriceindices

Open Library. (2018, 05 08). Defining Economics. Retrieved from Open Library:
https://open.lib.umn.edu/principleseconomics/chapter/1-1-defining-economics/

Robertson, D. (1936). Some notes on Mr. Keynes. Quarterly Journal of Economics, 168.

Studylecturenotes. (2018, 05 08). 78-lionel-robbinsbaron-robbins. Retrieved from studylecturenotes.com:
http://www.studylecturenotes.com/management-sciences/economics/78-lionel-robbinsbaron-robbins