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1 UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 8. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS. Post-war Keynesian consensus, 1944-75. (a) Industrialised.

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Presentation on theme: "1 UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 8. FROM POST-WAR KEYNESIANISM TO WASHINGTON CONSENSUS. Post-war Keynesian consensus, 1944-75. (a) Industrialised."— Presentation transcript:

1 1 UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre. 8. FROM POST-WAR KEYNESIANISM TO 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.

2 2 The 1930s: Keynes as oppositionist Keynes 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. Post-war period: the orthodoxy changes

3 3 BUT During World War 2, Treasury came round to Keyness 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!

4 4 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)

5 5 Great Depression: winter , unemployment 3 million / over 22% Two traumatic periods for the UK macroeconomy Stagflation 1970s WW WW Post-war boom early70s Early 90s recession Early 80s recession Unemployment in the UK, Post-war Keynesianism Classical revival Regular cycles 1936: publication of GT Consensus macro? NICE Note 3 successive dominant currents in post-war macro

6 6 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.

7 7 Unemployment Inflation Unemployment and inflation go in opposite directions during this period. They show an inverse relationship Inflation % Unemployment % of workforce Negative inflation is termed deflation UK unemployment and inflation: inverse relationship,

8 8 The Phillips Curve

9 9 Post-war Keynesianism, : 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 10 (b) Developing countries. Consensus favourable: Sustaining global demand IMF: Deficit financing (on a global scale). Opposite of its role later!

11 11 The idea of development, th 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.

12 12 Pressure for a New International Economic Order, 1970s. Terms of trade (TOT): TOT P X / P M 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 countrys TOT is clearly dominated by: P coffee / P machinery Now suppose: P coffee slumps but P machinery soars. TOT suffers a drastic deterioration.

13 13 Prebisch-Singer Hypothesis: e.g. Real agricultural raw material prices,

14 14 Percentage of trade within own region, 2002:

15 15 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. Pressure for a New International Economic Order.

16 16

17 17 Classical counter-attack: Washington Consensus, 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).

18 18 Classical counter-attack: Washington Consensus, 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 19 Stagflation: Breakdown of the stable Phillips Curve. From late 1960s, negative relationship between u and π no longer evident

20 20 Classical counter-attack: Washington Consensus, 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!

21 21 Classical counter-attack: Washington Consensus, 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.

22 22 Classical counter-attack: Washington Consensus, 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)

23 23 Classical counter-attack: Washington Consensus, 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.

24 24 The two main macroeconomic traditions – overview The General Theory of Employment, Interest and Money 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

25 25 YRYR P1P1 AD 1 P Y AD 2 P2P2 Y FE AS P3P3 AD 3 AD 4 P4P4 Keynes and classical economics BUT if economy is at Y FE (special case), thenclassical economics comes into its own again: resources are scarce / only effect of Y would be P. Keynes: Range where economy may settle [ be in equilibrium] at Y < Y FE (e.g. Y R ); AD can Y with little effect on P; government boost to AD justified?

26 per capita output Years to attain US 1999 level ( $30,600) 1% growth 3% growth 6% growth 9% growth Actual growth rate ( ) Germany25, UK22, Brazil4, China Ethiopia Small difference in growth rate can have massive effect in LR: Classical counterattack: arguments for shift to LR perspective:

27 27 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.

28 28 National output (Y) Time Actual output Trend growth Fluctuates with the course of the business cycle -- upturn, expansion, peaking-out, slowdown / recession. Classical revival / supply-side economics / counter-attack against post-war Keynesianism: the issue of long-run growth.

29 29 i.e. Illustrates classical revival / critique of post-war Keynesian consensus: Post-war consensus Theoretical basis Macro / Keynesian Issues centralised Fluctuations / business cycle Time horizonSR S-side or D-sideDemand-side Goal Stabilisation over the cycle Policy stanceInterventionist Classical revival Micro / classical Growth LR Supply-side Improvement in Supply Laissez-faire!

30 30 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 – Friedmans monetarism, etc. / supply emphasis / laissez-faire.

31 31 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 todays macro (Philips Curve, economic cycles, etc.) being tested in current conditions (emerging economies, financial implosion).

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