Presentation on theme: "8. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS."— Presentation transcript:
18. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS. UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre.8. FROM POST-WAR KEYNESIANISMTO WASHINGTON CONSENSUS.Post-war Keynesian consensus,(a) Industrialised countries.(b) Developing countries.The idea of development,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.
2Post-war period: the orthodoxy changes The 1930s: Keynes as oppositionistKeynes in GT: “Ricardo conquered England as completely as the Holy Inquisition conquered Spain”.[David Ricardo ( ): prominent representative of classical economics.]i.e. Keynes saw himself as embattled oppositionist facing entrenched classical orthodoxy.
3BUTDuring World War 2, Treasury came round to Keynes’s viewKeynes led UK negotiations:for war-time loans from USfor post-war global reconstructionTill mid-1970s, Keynesianism was to be the new orthodoxy!
4Keynes 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)
5Post-war Keynesianism Classical revival Great Depression: winter , unemployment 3 million / over 22%Two traumatic periods for the UK macroeconomyUnemployment in the UK,Early 80s recessionEarly 90s recessionPost-war boom1945-early70sWWStagflation 1970s‘NICE’WW1936: publicationof GTRegular cyclesConsensus macro?Post-war KeynesianismClassical revivalNote 3 successive dominant currents in post-war macro
6From Keynes to post-war Keynesianism Investment behaviour (principal cause of fluctuations) cannot be ‘modelled’ in simple waye.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.
7UK unemployment and inflation: inverse relationship, 1919 - 38 Unemployment % of workforceInflation %InflationUnemployment and inflation go in opposite directions during this period.They show an ‘inverse relationshipNegative inflation is termed deflation
9Post-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.
10(b) Developing countries. Consensus favourable: Sustaining global demandIMF: Deficit financing (on a global scale).Opposite of its role later!
11The 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.
12Pressure for a New International Economic Order, 1970s. Terms of trade (TOT):TOT ≡ PX / PMDeteriorating 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 / PmachineryNow suppose:Pcoffee slumps but Pmachinery soars.→ TOT suffers a drastic deterioration.
13‘Prebisch-Singer Hypothesis’: e.g. Real agricultural raw material prices,
15Pressure 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:: 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.
17Classical 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).
18Classical 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.
19‘Stagflation’: Breakdown of the stable Phillips Curve. From late 1960s, negative relationship between u and π no longer evident
20Classical 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!
21Classical 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.
22Classical counter-attack: ‘Washington Consensus’, 1975-96. By the early 1980s, a ‘Washington Consensus’ had become dominant in the IFIs.i.e. IMFWBUS Treasury as well? (claimed / emphasised by critics)
23Classical counter-attack: ‘Washington Consensus’, 1975-96. i.e. Reverse Bretton Woods / Keynesian consensus.→ All-round classical revival:minimise role of governmentreduce taxes / balance budgeteliminate impediments to free flow of capitalliberalise tradeprivatize state-owned enterprises.‘Washington Consensus’:Expression of this classical revival at international level.
24The 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 factoriesProblem was lack of effective demand.Unemployment prolonged → “all dead” before long-run equilibrium.→ intervention / stimulate demand in recession
25Keynes and classical economics AD4P4Keynes and classical economicsP3AD3Keynes: 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?AD2P2PASBUT 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↑.P1AD1YRYFEY
26Years to attain US 1999 level Classical counterattack: arguments for shift to LR perspective:Small difference in growth rate can have massive effect in LR:1999 per capita outputYears to attain US 1999 level( $30,600)1% growth3% growth6% growth9% growthActual growth rate ( )Germany25,350207431.5UK22,640321162.1Brazil4,4201966634231.7China78037014564449.8Ethiopia10057719499672.2
27LR Growth rate: the supply-side emphasis: 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.
28Classical revival / ‘supply-side economics’ / counter-attack against post-war Keynesianism: the issue of long-run growth.ActualoutputNational output (Y)TrendgrowthFluctuates with the course of the business cycle -- upturn, expansion, peaking-out, slowdown / recession.Time
29Fluctuations / business cycle i.e. Illustrates classical revival / critique of post-war Keynesian consensus:Classical revivalMicro / classicalGrowthLRSupply-sideImprovement in SupplyLaissez-faire!Post-war consensusTheoretical basisMacro / KeynesianIssues centralisedFluctuations / business cycleTime horizonSRS-side or D-sideDemand-sideGoalStabilisation over the cyclePolicy stanceInterventionist
30The 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.
31Themes.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).