1 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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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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UCL ECON1005. THE WORLD ECONOMY. Hugh Goodacre.
8. FROM POST-WAR KEYNESIANISMTO 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
25YR
P1
AD1
P
Y
AD2
P2
YFE
AS
P3
AD3
AD4
P4
Keynes and classical economics
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↑.
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?
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1999 per capita output
Years to attain US 1999 level( $30,600)
1% growth
3% growth
6% growth
9% growth
Actual growth rate (1990-99)
Germany 25,350 20 7 4 3 1.5
UK 22,640 32 11 6 4 2.1
Brazil 4,420 196 66 34 23 1.7
China 780 370 145 64 44 9.8
Ethiopia 100 577 194 99 67 2.2
Small difference in growth rate can have massive effect in LR:
Classical counterattack: arguments for shift to LR perspective:
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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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Nat
iona
l out
put (
Y)
Time
Actualoutput
Trendgrowth
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.
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i.e. Illustrates classical revival / critique of post-war Keynesian consensus:
Post-war consensus
Theoretical basis
Macro / Keynesian
Issues centralised
Fluctuations / business cycle
Time horizon SR
S-side or D-side Demand-side
GoalStabilisation over the
cycle
Policy stance Interventionist
Classical revival
Micro / classical
Growth
LR
Supply-side
Improvement in Supply
Laissez-faire!
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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.
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).