Post-war displacement of Keynesianism
The post-war displacement of Keynesianism was a series of events which from mostly unobserved beginnings in the late 1940s, had by the early 1980s led to the replacement of
The displacement of Keynesian thinking was driven by those who leaned towards purer free market policies, rather than the mixed economy which require a significant role for government intervention. Their motivations included a dislike of large governments which they saw as prone to interfere excessively in the lives of their citizens; an intellectual preference for Classical or Neoclassical economics and related schools; or in some cases a belief that their individual interests were best served by promoting a limited role for government. Efforts against Keynesianism took place on three fronts – in the academic world, in politics, and in the wider world of business and public opinion.
Background
Starting in 1936 with the publication of his
In the academic sphere, Keynes's position as the principal authority was largely confined to the Anglo-Saxon world; elsewhere Keynes was influential but not as central. This is partly because neoclassical economics,[note 1] the system of thought which Keynes launched his revolution against, had never been firmly established beyond the English-speaking nations in the first place, where instead there was often a tradition of using mixed-economy models such as the French dirigiste system.[2] While a critic of Keynes, the economic journalist Henry Hazlitt was to write in 1959:[3]
Keynes has conquered the present Anglo-American academic world, and the present Western political world, almost as completely as Marx has conquered Russia and China.
Similarly, the economic policies adopted in the developing world were largely based on Development economics – although that branch of economics is usually regarded as distinct from Keynesianism,
In the 1960s forces emerged that by the mid-80s would end the ascendency of Keynes's ideas. For Keynes's biographer Lord Skidelsky these can be divided into practical and intellectual dimensions; they are interrelated but in a complex and indirect way.[5] The failure of what was at the time perceived to be Keynesian economics to halt the
Economic historians have labelled the period from about 1951–1973 as the Age of Keynes or more commonly the
The anti-Keynesian revolution
As early as 1947,
Hayek himself dropped out of mainstream economics in 1950 to work chiefly in political philosophy.[4] Friedman and other allies continued to work as economists, though initially they only had marginal influence on the discipline as a whole.[4]
According to Professor Keith Shaw an important early milestone in Friedman's campaign against Keynesianism was the 1956 publication of Studies in the Quantity Theory of Money. [11] In this work Friedman restated the quantity theory of money, and obtained the attention of several Keynesian economists partly because he admitted Keynes was right to state that the velocity of circulation of money in the equation of exchange can vary, rather than being a constant as assumed by classical economists. However, Friedman's restatement was otherwise closer to the classical view in reducing the scope for beneficial government intervention in the economy.[11] An even more influential work was his 1963 publication of A Monetary History of the United States. Drawing on extensive empirical data, it further strengthened the case for his restated quantity theory of money, arguing that inflation was "always and everywhere a monetary phenomenon", while conceding that it could take one or two years for an increase in the money supply to lead to inflation. This ran counter to the then orthodox Keynesian interpretation that inflation was linked to employment, as modelled by the Phillips curve which predicted an inverse relationship between the two variables. Governments at the time would use the Phillips curve as part of their models to calculate the expected cost in terms of inflation for a stimulus designed to restore full employment. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist, and that it would be possible to have both inflation and unemployment rise at once.[12][note 6] Friedman had also argued that workers' expectations of future high inflation could lead to an inflationary spiral as they would push for increased wages in advance to try to compensate for expected future inflation.
Friedman's work began to gain increasing acceptance among academics after 1973, when
So prominent was Friedman in overturning the Keynesian consensus that the efforts to do so are sometimes referred to as "Milton Friedman's counter revolution." However, there were several other key influences. Professor Roger E Backhouse lists the
These attacks were so successful that by 1980
The ascendancy of financial-sector interests
When the Bretton Woods regime was established in the 1940s, free-roaming international capitalists were "caged".[16] Capital controls were installed in all major countries. In Great Britain for example, at one point families were not allowed to take more than £50 abroad for their foreign holidays.[17] Even before the controls were put in place, international transactions were at historically low levels, as financiers and speculators had been weakened or at least made wary by the long depression of the 1930s and the war.[18]
Nevertheless, power slowly began to shift back from public to private interests. The 1970s were a key decade for this process, but financial innovation had begun to erode the effectiveness of capital controls as early as the late 1950s, an example being the Eurodollar market which the US authorities decided not to regulate.[19]
Elliot and Atkinson state that 1968 was a pivotal year when power shifted in favour of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the
A common popular view was that the rise of financial power resulted from unplanned trends towards globalisation and technical innovation.[21][22] Reasons given include a calculation by the US that with the erosion of the hugely favorable trade balance they had enjoyed for the first few years after the war, financial liberation would be a good peaceful way of promoting continued US hegemony as US banks were far more advanced than their competitors in the rival economies of Europe and Japan. Another reason given is that the financial sector vigorously lobbied government to allow financial liberalization because it stood to gain hugely from it whereas the negative impact would be dispersed among all other sectors, with no one sector suffering greatly. So without a champion such as Keynes to stand up for the common good, a classic collective action problem prevented meaningful counter lobbying from occurring.[22][note 7] [note 8]
Changes in public opinion
For most of the first two decades after World War II there was considerable enthusiasm among the public for Keynesian policy, which was seen as a way to avoid the economic chaos of the
Various events began to erode the public's faith in the goodness of government, gathering force from the mid-fifties. For Britain and her
Concerns over the true motivations of public officials were further encouraged by
Labour militancy
Shifts in government policy
For the Anglo-American economies, Keynesian economics typically was not officially rejected until the late 1970s or early 1980s. Formal rejection was generally preceded by several years of the adoption of monetarist policies aiming to reduce inflation, which tended to counteract any expansionary fiscal policies that continued to be employed until Keynesianism was formally discarded.
In Canada the transition was less clearly marked, though Pierre Trudeau had begun to adopt monetarist anti-inflationary measures as early as 1975. [30] Likewise for most of continental Europe except for France, the transition away from Keynesian economics was less distinct, partly as Keynes had not been as important there, since European states had generally pursued
In South America, efforts were made to displace development economics as early as the mid fifties, by Milton Friedman's
In the developing countries of Africa and Asia, the mid seventies saw a backlash against the trend towards liberalism by the west, with a group of some 77 developing nations making determined efforts to lobby for a revived Bretton Woods system with strengthened capital controls to protect against adverse movements of private finance.
See also
- Neoclassical synthesis
- Neoclassical economics
- History of economic thought
- Global financial system
- International political economy
- Commanding Heights
- 2008–2009 Keynesian resurgence
Notes
- ISBN 978-1-84844-056-2p 2) that he generally meant what we would now call neoclassical economics.
- multiplier effect from stimulus, and due to said elasticity along with money dualism (many preferring land or commodities like gold to the legal tender, especially when they wish to save) increases in the money supply tend to translate to price rises in the classical fashion as predicted by the Quantity theory of money.
- ^ Though while war efforts were being escalated, the extent of war spending was hidden from President Johnson's Keynesian Economic Council, see The return to Keynes (2010), p29
- ^ Hayek had previously been involved in international resistance to Keynesianism and other forms of collectivist economic arrangements throughout the 1930s, attending for example the Colloque Walter Lippmann, which can be viewed as a forerunner of the Mont Pelerin Society. (see Cockett 1995, chpt 1)
- ^ A few of the free market think tanks pre-dated even the Mont Pelerin Society, most of them were founded in the 1970s or later.
- ^ Friedman had earlier made similar arguments verbally in his 1967 speech to the American Economic Association, where he had also first proposed his theory of the Natural rate of unemployment
- ^ In addition to Helleiner (1995) and the numerous sources he cites, see Great Transformations (2002) by Mark Blyth for more on how the US government was persuaded to support financial liberalisation. For a useful video documentary covering this topic, especially with relation to Britain but also the US see Adam Curtis's The Mayfair Set - Curtis covers additional aspects such as the increased power that markets gained after they were flooded with oil money following the 1973 price rise; and how in the 1960s the British government initially tolerated emergent phenomena such as corporate raiding as a possible solution to industrial inefficiency.
- ^ For more on the collective action problem and how after WWII it led to the decline of many institutions and laws set up to promote the common good, see The Rise and Decline of Nations (1984) by Mancur Olson. This book also briefly covers the other ways in which Keynesian economics had lost influence by the early 1980s.
- ^ Though others have rated the book joint second in influence with To Kill a Mockingbird.
- ^ In his 2009 book The Keynes Solution Paul Davidson argues that the failing responses were not really Keynesian at all, but based on a misunderstanding of Keynes' ideas.
References
- ^
Hall, Peter (1989). The Political Power of Economic Ideas: Keynesianism across Nations. ISBN 978-0-691-02302-1.
- ^ a b Hattersley, Roy (2009-09-05). "Keynes: Two studies of his economic theories". The Guardian. Archived from the original on 2020-03-31. Retrieved 2009-09-08.
- ^ Henry Hazlitt. "The Failure of the New Economics - complete book on PDF" (PDF). Ludwig von Mises Institute. Retrieved 2009-09-08.
- ^ ISBN 0-14-026042-0.
- ^ a b c d
ISBN 978-1-84614-258-1.
- ^ a b c
ISBN 978-0-230-61920-3.
- ^ a b c
ISBN 978-1-4088-0973-0.
- ^
PBS. Retrieved 2009-07-03.
- ^ Friedrich Hayek. "interview: Friedrich Hayek on John Maynard Keynes - Part II". HayekCenter.org. Retrieved 2009-07-03.
- ^ a b c
Cockett, Richard (1995). Thinking the unthinkable: think-tanks and the economic counter-revolution, 1931-1983. Fontana Press. ISBN 0-00-637586-3.
- ^ a b Shaw, Keith (1988). Keynesian Economics: The Permanent Revolution. Edward Elgar Publishing Ltd. pp. 52–56.
- ^ Friedman, Milton (March 1968). "The Role of Monetary Policy". American Economic Review.
- ^ Fletcher, Gordon (1989). The Keynesian Revolution and Its Critics: Issues of Theory and Policy for the Monetary Production Economy. Palgrave MacMillan. pp. xix–xxi.
- ^ a b c Adam Curtis (2007). The Trap part 1, see also parts 2 & 3 (TV documentary). UK: BBC and google video.[permanent dead link]
- ^ Blinder, Alan (June 2001). "Keeping the Keynesian Faith" (PDF). Princeton University. Retrieved 2009-06-27.
- ^ a b c d e
Larry Elliott, Dan Atkinson (2008). The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future. The Bodley Head Ltd. pp. 6–15, 72–81. ISBN 978-1-84792-030-0.
- ^ a b Wolf, Martin (2009). Fixing Global Finance. Yale University Press. pp. xi.
- ISBN 0-13-206988-1.
- ^
Daniel R. Kane (Mar 1982). The Eurodollar market and the years of crisis. ISBN 978-0-7099-1522-5. Retrieved 2009-09-07.
- ^ a b Boughton, James M. "Silent Revolution: The International Monetary Fund 1979–1989". International Monetary Fund. Retrieved 2009-09-07.
- ^ Wriston, Walter B. (1988). "Technology and Sovereignty". Foreign Affairs. Retrieved 2010-12-27.
- ^ ISBN 0-8014-8333-6.
- ^
Shousen, Mark (2007-03-06). "'Atlas Shrugged' – 50 years later". Christian Science Monitor. Retrieved 2011-07-08.
- ^ ISBN 1-85984-429-4.
- ^
Bateman, Bradley; Toshiaki, Hirai; Marcuzzo, Maria Cristina (2010). The Return to Keynes. ISBN 978-0-674-03538-6.
- ^
Thompson, Graham (2006). American culture in the 1980s. Edinburgh University Press. ISBN 0-7486-1910-0.
- ISBN 978-0-230-61920-3.
- ^
Cornwall, John (1990). The Theory of Economic Breakdown: An Institutional-Analytical Approach. Blackwell Pub. ISBN 0-631-14881-7.
- ^
Goldfinch, Shaun (2000). Remaking New Zealand and Australian Economic Policy. Georgetown University Press. ISBN 0-87840-846-0.
- ^
Finkel, Alvin (2006). Social policy and practice in Canada: a history. Wilfrid Laurier University Press. p. 286. ISBN 0-88920-475-6.
- ^
The Worldly Philosophers. pp. 278–8.
- ^ Klein, Naomi (2007). The Shock Doctrine. Penguin. pp. 50–78.
- ^
Green, Duncan (2003). Silent Revolution: The Rise and Crisis of Market Economics in Latin America. New York University Press. ISBN 1-58367-091-2.
- ^
Krasner, Stephen (2003). Structural Conflict: The third world against global liberalism. University of California Press. ISBN 0-520-05478-4.
Further reading
- ISBN 0-8014-8333-6.
- ISBN 0-00-637586-3.
- ISBN 978-0-521-01052-8.
- Stedman Jones, Daniel (2012). Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics. ISBN 978-0691151571.
- ISBN 978-0-691-14909-7.
External links
- Economists and the rise of neo-liberalism Renewal (2009) by Roger Backhouse
- The Retreat from Keynesian economics published in The Public Interest (1981) by Martin Feldstein - a moderate view from an anti Keynesian economist.