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


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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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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.

  • 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.


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    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.


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    • 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!


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    • 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)


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    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


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    • 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.


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    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


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    The Phillips Curve


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    • 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.


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    • (b) Developing countries. Consensus favourable:

      • Sustaining global demand

      • IMF: Deficit financing (on a global scale).

        • Opposite of its role later!


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    • 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.


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    • 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.


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    ‘Prebisch-Singer Hypothesis’:

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


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    Percentage of trade within own region, 2002:


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    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.


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    • 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).


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    • 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.


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    ‘Stagflation’: Breakdown of the stable Phillips Curve.

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


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    • 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!


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    • 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.


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    • 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)


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    • 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.


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    • 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


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    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


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    Classical counterattack: arguments for shift to LR perspective:

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


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    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.


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    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


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    i.e. Illustrates classical revival / critique of post-war Keynesian consensus:


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    • 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.


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    • 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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