Traditional variants of social democracy have embraced Keynesian economics as a means for securing objectives of full employment and expanding prosperity. Moreover, Keynesian policy prescriptions have favoured an expansion in public expenditure as a proportion of national income, and this in turn has facilitated traditional social democratic goals to expand the welfare state and use fiscal policy as one means of securing a progressive redistribution of income. The commitment to full employment additionally empowered the trade union movement. Moreover, to ensure that this increase in industrial strength did not become destructive to the economy and society in general, Keynesianism facilitated the development of a progressive form of corporatism amongst many European nations, as collective labour sought an increase in the social wage and/or workplace reforms as an alternative to inflationary wage militancy. Keynesianism advocated government intervention in the economy to correct examples of market failure. At the micro-level, this encouraged the development of active industrial policy, whereas at the macro-level Keynesianism held that government needed to actively manage aggregate demand to ensure that full employment occurred.
KeywordsMonetary Policy Fiscal Policy Real Wage Rational Expectation Aggregate Demand
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- 2.First coined by Ohlin in a paper in the Economic Journal in 1937, the ‘Stockholm School’ included Dag Hammarskjöld, Alf Johansson, Erik Lindahl, Erik Lundberg, Gunnar Myrdal and Bertil Ohlin (Hansson, 1991: 168–213). Their analysis was developed in parallel to Keynesianism but with greater emphasis upon disequilibrium analysis, derived from assumptions of irrational factors influencing economic actors and uncertainty of expectations in a dynamic economy, inferring that static theory is an inaccurate approximation of dynamic reality (Myrdal, 1927; Winch, 1966: 170). They argued that market economies contain a large element of cyclical instability and therefore governments should control the business cycle via fiscal policy.Google Scholar