UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 8. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS. Post-war Keynesian consensus, 1944-75. (a) Industrialised countries. (b) Developing countries. The idea of development, 1945-84. Pressure for a New International Economic Order, 1970s.
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UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre.
8. FROM POST-WAR KEYNESIANISM
TO WASHINGTON CONSENSUS.
Post-war period: the orthodoxy changes
Great Depression: winter 1932-3, unemployment 3 million / over 22%
Two traumatic periods for the UK macroeconomy
Early 90s recession
Early 80s recession
Unemployment in the UK,
Note 3 successive dominant currents in post-war macro
UK unemployment and inflation: inverse relationship, 1919 - 38
Unemployment % of workforce
Unemployment and inflation go in opposite directions during this period.
They show an ‘inverse relationship
Negative inflation is termed deflation
The Phillips Curve
e.g. Real agricultural raw material prices, 1968-2002
Percentage of trade within own region, 2002:
Pressure for a New International Economic Order.
1968-1981: Declared aim of World Bank was to alleviate world poverty.
(From early 1980s, focus shifted to debt management.)
1986 / Uruguay (8th) round:
Declared aim was to bring developing countries into the institutions’ decision-making process.
‘Stagflation’: Breakdown of the stable Phillips Curve.
From late 1960s, negative relationship between u and π no longer evident
‘Classical’ assumptions: full employment / scarce resources.
Resources not scarce: unemployed workers, idle factories
Problem was lack of effective demand.
Unemployment prolonged → “all dead” before long-run equilibrium.
→ intervention / stimulate demand in recession
Keynes: Range where economy may settle [ be in ‘equilibrium’] at Y < YFE (e.g. YR); AD↑ can → Y↑ with little effect on P; government boost to AD justified?
BUT if economy is at YFE (“special case”), then “classical economics comes into its own again”: resources are scarce / only effect of Y↑ would be P↑.
Keynes and classical economics
Classical counterattack: arguments for shift to LR perspective:
Small difference in growth rate can have massive effect in LR:
Classical counterattack: arguments for shift to LR perspective, contd:
Cross-country comparison of growth in output per worker since 1870:
Classical revival / ‘supply-side economics’ /counter-attack against post-war Keynesianism:the issue of long-run growth.
National output (Y)
Fluctuates with the course of the business cycle -- upturn, expansion, peaking-out, slowdown / recession.
i.e. Illustrates classical revival / critique of post-war Keynesian consensus: