Aggregate Supply in Interwar Britain
Traditionally, economists after Keynes have attributed the high unemployment of interwar Britain to fluctuations in aggregate demand. However, recently more emphasis has been placed on supply factors. Economic historians such as Aldcroft (I970) and Richardson (I967) have pointed to the problems of structural adjustment from the old staples to the new industries, while economists in the classical tradition have emphasised labour market rigidities. In particular, Benjamin and Kochin (I979) point to the existence of unemployment benefits, which are held to have reduced the effective supply of labour, while Beenstock et al. (I984) emphasise the role of real wage determination. A change in the wage determination process during the I 930S is seen as allowing a reduction in real wage growth, which thus raised the productive potential of the economy by allowing the profitable employment of less productive workers. In this paper we examine the relative importance of supply and demand factors, drawing the following conclusions. First, supply factors were only important during the early 1920S. Secondly the supply shock of the early I920S was due to a fall in hours worked rather than any change in unemployment benefits or structural problem. Thirdly, the recovery of the 1930S was due to demand factors and not due to any unusual behaviour of wages.