CHAPTER 6LIBERALISM SINCE WORLD WAR II

• Keynesian economics is an economic theory named after John Maynard Keynes, a British economist who lived from 1883 to 1946. He is most well-known for his simple explanation for the cause of the Great Depression. His economic theory was based on a circular flow of money, which refers to the idea that when spending increases in an economy, earnings also increase, which can lead to even more spending and earnings. Keynes' ideas spawned numerous interventionist economic policies during the Great Depression.

• In Keynes' theory, one person's spending goes towards another person's earnings, and when that person spends his or her earnings, he or she is, in effect, supporting another person's earnings. This cycle continues on and helps support a normal, functioning economy. When the Great Depression hit, people's natural reaction was to hoard their money. Under Keynes' theory, this stopped the circular flow of money, keeping the economy at a standstill.

• Keynes' solution to this poor economic state was to "prime the pump." He argued that the government should step in to increase spending, either by increasing the money supply or by actually buying things itself. During the Great Depression, however, this was not a popular solution. It is said, however, that the massive defense spending that United States president Franklin Delano Roosevelt initiated helped revive the U.S. economy.

• Keynesian economics advocates for the public sector to step in to assist the economy generally, which is a significant departure from popular economic thought that preceded it — laissez-faire capitalism. Laissez-faire capitalism supported the exclusion of the public sector in the market. The belief was that an unfettered market would achieve balance on its own.

http://www.wisegeek.org/what-is-keynesian-economics.htm

A. British Welfare State Sir William Beveridge: social security is

necessary but should not stifle incentive, opportunity or responsibilityo Provide a minimum to live but leave room

for people to strive to obtain more than the minimum

Britain established several acts to provide some social security (social safety nets, social programs)

“post war consensus”: when both the collectivist Labour Party and the Individualist conservative Party agreed help was needed

Start of the growth of modern liberalism internationally – some social programs, to assist people – employment insurance, assistance to elderly , child care and health care

B. Post War Economy – Canada Page 215 Strengthened social programs Create of welfare state ideas:

o Universal health careo Old age securityo Foreign investment review agencyo CRTC

Moved towards Modern (contemporary) liberalism – abandoning the more ‘free market’ ideas for some government intervention

C. Economic Crisis: 1970s Causes:

o Withdrawal from Bretton Woods agreement These countries no longer had to use price of gold to

determine worth of currency World currencies freely floated on markets – led to inflation

and slowing of economic activitieso Arab-Israeli War (4th)

OPEC – 5 month embargo on oil to US and Netherlands (supporting Israel)

reduced production – prices skyrocketed – gas shortages in US – consumer goods rose – prices rose – economic slowdown and inflation

led to the need to change economic strategy liberal democracies faced a slowdown in the economy (recession)

and inflation - Stagflation British PM Callaghan realized that they could no longer spend their

way out of recession (Keynesian economics wasn’t working)

D. A New Way of thinking: Monetarism Recession of 1970s led to a pendulum swing back to

favouring the more classical liberal notion of laissez faire or free market (in some countries)

Monetarism: o Control of countries money supply is the best way

to encourage economic growth and limit unemployment and inflation

o Money supply is controlled through the regulation of interest rates

Milton Friedmano Inflation was caused by too much money supply

(fault of the Central Banks over production)o Argued that as money rises – consumer spending

rises – demand rises – inflation rises....which leads to a recession

o Wanted money supply to be linked to the rate of inflation (an economic indicator)

Friedrich Hayeko Critic of collectivism (and Keynes)o Believed for collectivism to work the government

needed to control the economy which would eventually lead to the government controlling social aspects of people’s lives

o Believed it was impossible for government to have the knowledge and ability to make all economic decisions

Government controlled supply but would never have enough knowledge of demand

Both Friedman and Hayek promoted Price System, Free marketo Only way to balance supply and demand and

maintain individual liberty

E. Price System/Free Market: There are 5 key characteristics in a market economy1. Private ownership/freedom to buy and sell

Goods and services must belong to the individual who is free to sell them for whatever price they can convince a buyer to pay

The buyer is free to seek out the best deal possible2. Free competition

Businesses are free to produce whatever they want, however, many businesses can produce the same goods

Competition helps keep prices low for consumers3. Prices are set by forces of supply and demand

Price is determined by how much is available compared to how much the consumer wants it. 4. Profit motive

To make as much money (profit) as possible – ultimate goal5. Consumer Sovereignty

The consumer decides what will be produced with the resources available as they will only buy what they want

F. Monetarism vs. Keynes

Keynes – interventionalist Monetarist – more classical liberalist

o Margaret Thatcher – Great Britaino Ronald Reagan – USA

Margaret Thatcher: Conservative Prime Minister 1979 - 1990

Ronald Reagan: Republican President 1981 - 1989

ECONOMIC PRINCIPLES AND THEPRACTISE OF LIBERALISM

USA argued that liberal goals are achieved by limiting government intervention and only providing the most basic social programso Drive for wealth arises from self interest and need to complete (individualism, classical liberalism

notions) Canada, Sweden favour more government intervention

o Argue that inequality undermines liberalism as citizens fall victim to business cycle and struggle (modern liberalism – social safety nets)

o Still encourage private property and initiative but also believe in government intervention and taxation as essential elements of society

o The level of involvement depends on the status of the economy

A. Sweden: **Social Safety Nets: generous welfare system, unemployment, maternity etc payments are extremely high

in order to maintain standard of living of peopleo Cradle to Grave (or “womb to tomb”) Caused extremely high taxes to the people. Estimated that in the 1960s, 70% of the population depended

on the government for its livelihood Reform was needed

o 1992 – Tax rates: 50% of income, Canada: 36.5%, USA: 29.4%o 1993 commission made necessary changes

- examples: unemployment insurance in the former system provided 90% of person’s previous income, after reforms only 80% of income

- Example: sick or injuring – received 90-100% of salary. After the reforms worker had to wait 2 weeks and receive only 80% of salary

B. Canada Individualism (can have private ownership, individual rights) and collectivism (still look out for needs of

society - social assistance programs, gov’t ownership Federal Level – (1990s)Canada has implemented some Keynesian Economics - put billions into building

and repairing infrastructure o Today: Harper – stimulus package to help failing economy

Provincially (Alberta)– gone more towards supply side - Ralph Klein cut spending to reduce the deficit (education, health care) de-regulated to help improve business (less rules) privatization (AGT)