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.
8. FROM POST-WAR KEYNESIANISM
TO WASHINGTON CONSENSUS.
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
Unemployment % of workforce
Unemployment and inflation go in opposite directions during this period.
They show an ‘inverse relationship
Negative inflation is termed deflation
‘ 38Prebisch-Singer Hypothesis’:
e.g. Real agricultural raw material prices, 1968-2002
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.
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’ / perspective, contd: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 perspective, contd:classical revival / critique of post-war Keynesian consensus: