IN WHAT WAYS HAVE ECONOMIES

REFLECTED THE PRINCIPLES OF

LIBERALISM SINCE THE SECOND

WORLD WAR?

OUTCOME 2.10

Views of Economics Following WWI

• In the decades following the First World War, counties such a Britain, USA, and Canada all implemented changes to the role of the state.

• There was a growth in the implementation of the principles of modern liberalism, particularly in relation to trade, international cooperation, and foreign aid.

• The idea of providing a “social safety net” expanded

The Postwar (WWII) Canadian Economy:

The government started several programs characteristic of a welfare state:

• Universal healthcare• Canadian Pension Plan• Foreign Investment Review Agency – later

renamed Investment Canada – geared toward monitoring take foreign investment

• The Canadian Radio and Television Commission• Atomic Energy of Canada Limited

(pg 215 for more information)

Boom and Bust

• According to Keynes’ theory:– In a recession, governments spend more to

influence employment and thus demand– In prosperous times, governments spend less to

control inflation.

• So inflation should not exist in a stagnant economy.

Or DOES it?

Energy Crisis (1973)• Arab states, frustrated by

losses in war to Israel, seek to punish Israeli’s allies.

• OPEC (The Organization of Petroleum Exporting Countries) declares an oil embargo on the nations of the West, specifically the US and the Netherlands

• OPEC also slowed the production of oil – causing prices to quadruple.

Energy Crisis and the West• Oil shortages wreak havoc

with industrialized economies and force gas rationing in the U.S.

• Goods became more expensive, causing rising inflation and the slowing of the economy.

• The embargo lasted for 5 months.

• Freely floating currencies also caused inflation. USA had dropped off the gold standard in 1971

1970s

• So, inflation and a recession occurred at the same time.

• This is called stagflation.

StagflationMind=blown

How did stagflation effect the UK?

• Inflation caused the cost of running social programs to increase, yet the slowing of the economy meant governments could collect less tax revenue.

• in 1976, the British government was forced to borrow US$3.9 billion from the International Monetary Fund

• The result was an increasing deficit and no means to repay the debt.

See British Prime Minister James Callaghan’s speech and the chart on American inflation on page 217.

Pause for reflection…

• Why did Keynes’ ideas not work as well as he may have hoped?

• Alternatives to Keynes were dusted off…

• This theory holds that control of a country’s money supply is the best means to encourage economic growth and limit unemployment and inflation.

• It was a return to the principles of classical liberalism through the application of laissez-faire policies.

• New leaders attempted to undo interventionist policies of previous governments.

Hayek and Monetarism• Fredrich Hayek felt government

control of the economy would threaten the liberty of the individual as the government gained control over all aspects of a citizen’s life.

• Hayek believed that the price system (free market) was the only way to balance supply and demand in the economy while maintaining individual liberty.

• Decrease government intervention and spending in the economy

• Downsize the public sector by privatizing government owned business and services/programs and also and deregulate the economy

• Decrease taxes and lower interest rates to increase the supply of capital to the “job creators”

• Control the amount of money in supply• Accept unemployment to keep wages low – as this

helps business to grow (can reinvest profits)• Keep government small (costs less money then to

run a government

Principles of Monetarism

Freidman and Monetarism• Milton Friedman was a key economic thinker associated with

neo-Conservatism (bringing back of the ideas of classical liberalism).

• Influenced by Hayek• Since his ideas were more closely linked with classical liberalism

he was opposed to modern liberalism• He was against the welfare state (social safety nets via

government intervention) as it requires large government and excessive spending which leads to debt

• He was for fiscal responsibility and balanced budgets• His theory is called MONETARISM because it focuses on the

amount of money circulating in the economy.Belief Regarding Inflation:

Inflation is the result of an excess of money produced by the central banks.

If Keynesian theory is called Demand Side Economics…

Demand Side Economics Supply Side Economics

What might Monetarism be called?

Supply-Side Economics is also known as “Trickle-down” economics

What’s supposed to “trickle down”?

• Wealth– Tax breaks to the wealthy will result in more

money to invest in jobs– Those jobs will give money to more people– Thus the wealth will “trickle-down”

Examples of Supply-Side policies• Enterprise

– Incentives for business start-ups– Tax incentives for research and development– lower business taxes on profits arising from patents

• Capital – Money spent on infrastructure– New tooling in industry

• Human factor– Tax reforms and work incentives– Education and training

• Markets– more competition between businessesopenness to trade and investment

from other countries

Monetarism in Practice.

Reaganomics• Ronald Reagan (US Pres 81-88) • Previous administrations had tried to

combat stagflation with wage and price controls, but Reagan wanted less government involvement and a more individualist approach to economics.

• Lower taxes, especially among the wealthy, will result in greater investment in the economy, therefore greater growth.

• Increased investment and government defense spending will “trickle down” through the economy to the working class.

In Times Of Recession…

• Reduce corporate taxes– Creates more profit– Acts as incentive to enter

business• Reduce public income tax

– Increases public’s incentive to work

– Provides more money to spend

– Increased production creates demand

• Supply-siders insist that increased demand for goods and services must come from the private sector, not from government spending.

• The unrestricted market will eventually bring inflation under control

In Times of Inflation…

Reaganomics in ActionReaganomicsFollowing 1981 the Reagan administration put in action the following policies…

• Tax cuts primarily for corporations and the wealthy• Cut income tax 25%

• Government spending cuts in social services• Welfare subsidies, Medicaid, food stamps

• A stable money supply

• Deregulation of the economy• Reduced environmental, health, & safety regulations

• Aim to balance the budget.See the chart of government spending on pg 221

Thatcherism in ActionThatcherism• Following 1979 the

Thatcher government in Britain put in action the following policies…– Wide scale privatization– Emphasis on individual

initiative– Reduced the power of labour

unions (pg 221)– Reduced income and

corporate taxes

British prime minister Margaret Thatcher:

Influenced by monetarism and tried to reduce the government’s role in the economy through the application of

classical economic principles.

Reaganomics/Thatcherism: A Balance Sheet

Arguments in Favor

• A reduction in unemployment

• A reduction in inflation

• An increase in production

• A world wide move towards private enterprise

Arguments Against

• Growing national debt

• Growing inequalities in income levels

• A boom and bust cycle

• The decline of the middle class.

Blair’s Third Way• Tony Blair (Labour) ran for office in 1997 on a platform

called the “Third Way”• It was the adoption of some Thatcherite and free-market

policies, while maintaining some social programs• It was a compromise between Keynesian economics and

monetarism - an attempt at balancing individualistic values of monetarism with collectivist values of social justice.

• In practice, resulted in increased public spending on health care and education and introduced a minimum wage.

• At the same time, introduced tuition fees for post-secondary education.