Daniel Sargent / History 186 / Lecture 5 – The Keynesian Era

John Maynard Keynes, 1883-1946

Lecture topic is political economy, the institutional circumstances that frame the global economy, today with particular attention to the advanced industrial capitalistic world.

What were the defining characteristics of the 1950s, 60s? Growth. 3% average annual growth! (Most average annual growth since BCE = 0%.) Japan most impressive. 9% average annual growth. Great Britain is anomalously less impressive.

Why growth?

1) Rebuilding. Highways, etc. But not sufficient; this happened after WW1, but not same growth.

2) How existing methods of production are applied to postwar industrial output. What are they? Technological, institutional, procedural. Production pioneered in U.S. by Ford, prewar. Postwar, Europe takes advantage.

3) Cheap energy. Coal prewar. Oil postwar.

4) Labor, urbanization up. Agrarian move to factory. Baby boom/more laborers. Growth driven by pre-existing technologies is called EXTANSIVE GROWTH. Eventually hits a wall. Europe hits that wall, late 1960s.

5) Government spending up. Tax populations and borrow for war. British government spending is 35% GDP.

Key questions: 1) Why did the State grow? Why did Western European economies grow so rapidly?

1st, term clarification.

WHO/WHAT is a LIBERAL. 1) Geneology begins with Adam Smith. Small government, free markets. Economic philosophy: private property and self interest. Force of good. Growth and prosperity. 2) Keynes. Change in liberalism. Accepts provision of basic welfare goods as necessary function of State economy. This distinguishes 20th and 19th century liberalism. Keynes key figure, and FDR key political figure.

WHO/WHAT is a SOCIALIST. 1) For Marx, revolutionary proletariat seizes and makes public all private property, and State is all powerful. 2) Reform socialism. Originates late 19th century. Improve people’s lives within capitalistic democratic framework. Not revolutionary. Revolutionary socialism endures in Eastern Bloc. In West, reform socialism. Social democracy = rule of law.

CHANGE from REVOLUTIONARY SOCIALISM to REFORM SOCIALISM? Begin with Marx, historical determinism. Class struggle. By late 19th century, revolutionary aspect called into question. Lenin insisted on revolution. Edward Bernstein, one of most influential people to change to reform socialism. Willing to work with liberals. Accepts legitimacy of parliamentary democracy. Rosa Luxemberg, class based revolution. Will not work with liberals.

CONSEQUENCES of emergence of REFORM SOCIALISM? 1) Rise social democracy as mass political movement. Reform is able to win majority in Germany, democratic context. 2) Division of Left. 3) Rise of fascism/socialist right wing. Example, Mussolini, 1922, first fascist to come to power. Idea concocted, “totalitarianism,” to discuss socialism and fascism in same context.

Why does liberalism survive the crisis of 1930s? Who sustained it? Keynes. For Marshall, markets were self-correcting. Keynes showed markets were not always self-correcting. How? Fiscal and monetary. FISCAL =  tax (decrease demand) and spend (increase demand). Keynes: government policy should be counter-cyclical. I.e., recession -> spend. Boom -> don’t cut taxes. Dampen. MONETARY = printing money. Print more -> cheaper money. Interest rate = price of money. Interest rate low -> borrowing incentivized.

WHAT is an INTERNATIONAL REGIME? It structures the operation of international economy. Examples are prewar, gold standard. 1930s, anti-regime period. Tariffs. Restored, Bretton Woods system. Later transformed 1970s, Nixon.

What was the GOLD STANDARD, 2nd half of 19th century? International regime. Government tied currency value directly to gold. 1821, British government 1st to do it. 1873, Germany, France, U.S. joined, then others. Consequences? Facilitated international trade. Self-correcting system. Trade deficit meant automatic gold exported. But, this can cause depression. Regime sacrifices intramural stability to international economy. Can be politically costly at home.

BRETTON WOODS system, 1944. Key institution = IMF, International Monetary Fund. Key innovation = dollar standard. Want to procure basic stability of exchange rates. Result? Allows monetary base of whole system to expand rapifly. Not based on mining. IMF also lends to economies, to beat deficits. IMF tried to mitigate gold standard’s harsh automated discipline. Another Bretton Woods institution: International Bank for Reconstruction and Development (IBRD). For rehabilitating war-ravaged countries. Later, World Bank. Last Bretton Woods institution: General Agreement of Trade and Tariffs. GAT 3 years after BW, negotiated. Following WW2 high tariffs. Signatory nations agree that benefits of tariffs will be universally shared. Makes tariff reduction faster and multilateral.

POLITICS of BRETTON WOODS? Not popular on Walstreet. Argue that too much intervention. Legacy? American hegemony.

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