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UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 8. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS.

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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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slide1

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.
  • Washington Consensus: the pendulum swings back.
    • Shift to LR perspective.
    • Critique of Keynesian demand management policy.
      • e.g. Poor record of UK.
    • Pressure for NIEO weakens.
    • All-round reversal of Keynesian approach.
slide2

Post-war period: the orthodoxy changes

  • The 1930s: Keynes as oppositionist
  • Keynes in GT: “Ricardo conquered England as completely as the Holy Inquisition conquered Spain”.
    • [David Ricardo (1772-1823): prominent representative of classical economics.]
  • i.e. Keynes saw himself as embattled oppositionist facing entrenched classical orthodoxy.
slide3

BUT

  • During World War 2, Treasury came round to Keynes’s view
  • Keynes led UK negotiations:
    • for war-time loans from US
    • for post-war global reconstruction
  • Till mid-1970s, Keynesianism was to be the new orthodoxy!
slide4

Keynes was chief British negotiator at 1944 international conference at Bretton Woods in New Hampshire, US.

  • Aim of conference was to map out post-war economic order.
  • Laid foundations for establishment of:
      • International Monetary Fund (IMF)
      • World Bank (International Bank for Reconstruction and Development)
      • eventually (after half a century of ‘rounds’ of negotiations) the World Trade Organisation (WTO)
slide5

Great Depression: winter 1932-3, unemployment 3 million / over 22%

Two traumatic periods for the UK macroeconomy

Early 90s recession

‘NICE’

Early 80s recession

Post-war boom

1945-early70s

WW1 1914-18

WW2 1939-45

Consensus macro?

Regular cycles

1936: publication

of GT

Unemployment in the UK,

1880-2005.

Stagflation 1970s

Classical revival

Post-war Keynesianism

Note 3 successive dominant currents in post-war macro

slide6

From Keynes to post-war Keynesianism

  • Keynes:
    • Investment behaviour (principal cause of fluctuations) cannot be ‘modelled’ in simple way
      • e.g. Determinants if I are unpredictable:
        • expectations, mood (opti-/pessimistic), ‘animal spirits’, etc.
  • Post-war Keynesianism became the orthodoxy / textbook macro.
    • e.g.Phillips Curve appeared to be stable – a policy ‘menu’.
    • Simply choose whether u or π is problem at given moment:
      • High u → reflationary measures.
      • High π → deflationary measures.
slide7

UK unemployment and inflation: inverse relationship, 1919 - 38

Unemployment

Inflation %

Unemployment % of workforce

Inflation

Unemployment and inflation go in opposite directions during this period.

They show an ‘inverse relationship

Negative inflation is termed deflation

slide9

Post-war Keynesianism, 1944-75: the global dimension.

  • (a) Industrialised countries. Consensus uneasy.
    • Demand management / sustain global demand / prevent new Depression.
    • Deficit financing OK if economy slows down.
    • Reduce tariffs / prevent new breakdown in trade.
  • Europe: State intervention -- prestige high:
    • Soviet 5-year plans, war-time planning in Western Europe.
  • US: less positive about intervention / active Demand Management Policy.
    • Tariffs: powerful US protectionist lobbies.
slide10

(b) Developing countries. Consensus favourable:

    • Sustaining global demand
    • IMF: Deficit financing (on a global scale).
      • Opposite of its role later!
slide11

The idea of development, 1945-84.

    • 19th century: develop natural resources of colonies.
    • Oxford, late 1930s: development economics → academic syllabus: in ‘Colonial Studies’ course.
    • Post-war: from training colonial administrators to training their replacements!
  • Characteristic topics:
    • Relation between subsistence and commercial sectors (or ‘traditional and modern’).
    • Relation between town and country.
    • Relation between manufacture and agriculture.
    • Obstacles to the consolidation of wage-earning labour force.
    • Influence on economic life of traditional society and culture.
  • Irony: Latin America: focus of much of the theoretical activity.
  • East Asia: principal claim of an actual ‘success story.
slide12

Pressure for a New International Economic Order, 1970s.

  • Terms of trade(TOT):
  • TOT ≡ PX / PM
  • Deteriorating commodity terms of trade:
    • Example: Say we have a country where:
      • 90% of its exports are coffee.
      • 90% of its imports consist of agricultural machinery.
    • i.e. The country’s TOT is clearly dominated by:
      • Pcoffee / Pmachinery
    • Now suppose:
      • Pcoffee slumps but Pmachinery soars.
    • → TOT suffers a drastic deterioration.
slide13

‘Prebisch-Singer Hypothesis’:

e.g. Real agricultural raw material prices, 1968-2002

slide15

Pressure for a New International Economic Order.

  • From early 1960s: Newly independent countries enter UN, etc.
  • → International institutions had to respond / take development issues on board:

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.

slide17

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • Critique of Keynesian demand management policy:
  • US: Keynesianism / post-war consensus always grudging acceptance anyway.
  • UK: UK Conservative Party:
    • Final fling of expansionary demand management, early 1970s.
    • Under Conservative (Heath) government – ‘Barber boom’.
    • Then reaction against this: Thatcher leader (1975), PM (1979).
slide18

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • Critique of Keynesian demand management policy:
  • Keynesianism / post-war consensus breaking down, early 1970s:
  • Critics of Keynesianism were now pointing out:
    • Breakdown of Phillips curve.
        • Friedman (‘monetarism’) claimed by to show futility / destabilising effect of Keynesian demand management policy.
slide19

‘Stagflation’: Breakdown of the stable Phillips Curve.

From late 1960s, negative relationship between u and π no longer evident

slide20

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • Critique of Keynesian demand management policy:
  • A major argument (UK but international influence):
    • Keynesian policies particularly dominant in UK.
    • But relatively poor performance of UK economy.
      • Poor growth relative to other industrialised countries.
      • ‘Stop-go’ / instability – amplitude of fluctuations.
      • Stagflation (collapse of Phillips Curve) particularly severe.
      • BOT problems particularly intense.
    • See Sloman chapter!
slide21

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • Pressure for NIEO eases.
  • Bargaining power of newly-independent countries losing force from mid-80s.
    • Global political developments:
          • Iran-Iraq war.
          • Faltering then collapse of Soviet Union, etc.
          • East Asian examples of rapid growth through integration with omk-dominated market system > confrontation / contention.
slide22

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • By the early 1980s, a ‘Washington Consensus’ had become dominant in the IFIs.
    • i.e. IMF
    • WB
    • US Treasury as well? (claimed / emphasised by critics)
slide23

Classical counter-attack: ‘Washington Consensus’, 1975-96.

  • i.e. Reverse Bretton Woods / Keynesian consensus.
  • → All-round classical revival:
        • minimise role of government
        • reduce taxes / balance budget
        • eliminate impediments to free flow of capital
        • liberalise trade
        • privatize state-owned enterprises.
  • ‘Washington Consensus’:
        • Expression of this classical revival at international level.
slide24

The two main macroeconomic traditions – overview

  • The General Theory of Employment, Interest and Money. 1936

‘Classical’ assumptions: full employment / scarce resources.

Keynesian critique:

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

slide25

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?

AS

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↑.

P4

P3

AD4

P2

AD3

AD2

Keynes and classical economics

P

P1

AD1

YFE

YR

Y

slide26

Classical counterattack: arguments for shift to LR perspective:

Small difference in growth rate can have massive effect in LR:

slide27

Classical counterattack: arguments for shift to LR perspective, contd:

Cross-country comparison of growth in output per worker since 1870:

  • LR Growth rate: the supply-side emphasis:
    • Has begun to rise at different points in time (‘take-off’).
    • Has then continued at different rates.
slide28

Classical revival / ‘supply-side economics’ /counter-attack against post-war Keynesianism:the issue of long-run growth.

Actual

output

National output (Y)

Trend

growth

Fluctuates with the course of the business cycle -- upturn, expansion, peaking-out, slowdown / recession.

Time

slide30

The two main macroeconomic traditions - review:

  • Classical economics.
    • Nearest to micro tradition:
      • Growth theory: micro modelling.
      • TCA: note: particular commodities; FE assumption.
    • Emphasis on supply.
      • e.g. Free trade versus intervention debate (List vs. Smith-Ricardo, etc.) concerned supply effects.
  • Post-war [Keynesian] consensus.
    • Keynesianism / demand management / interventionism.
  • Washington [Classical] Consensus.
    • Classical / classical revival – Friedman’s ‘monetarism’, etc. / supply emphasis / laissez-faire.
slide31

Themes.

  • Keynesian critique of classical (micro / S-side) economics (“applicable to a special case only”).
  • History of economic ideas is essential to assessing their analytical power.
  • Validity of entire framework of today’s macro (Philips Curve, economic cycles, etc.) being tested in current conditions (emerging economies, financial implosion).
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