In 1929 global industrial capitalism crashed and the world entered what has become known as the Great Depression. The prevailing international regime of classical liberalism and neoclassical economics did not have workable solutions for the problem. The severe economic problems gave rise to intense political upheavals in most industrialized nations. The responses to those upheavals involved various approaches to greater state control. By the time of world war II Keynesian economic theory had become a generally accepted pillar of economic management in the context of social democratic governments. Early neoliberals emerged after the war protesting this new paradigm. They began calling for a return to the principles of classical liberalism and neoclassical economic management.
These two previous diaries are background to this diary.
Globalization, A Pictorial History
Neoliberals: Where Do They Come From?
British industrial capitalism was the dominant player in the global economy up until WWI. There were close links between the British and American financial elites. The war proved traumatic for the British economy and it was the powers of Wall St. that wielded great influence on the decision of the US to finally enter the war. It marked an important point in the transition of economic power from London to New York.
The war left the global economy in a generally unstable state. For much of the 1920s the US was enjoying a boom of deceptive prosperity. However, much of Europe was experiencing various economic crises. In 1929 the whole thing crashed. All of the world's industrial economies entered depression. The US and Germany experienced somewhat more severe problems than other nations. The people in charge such as US president Herbert Hoover responded in terms of the conventional wisdom of neoclassical economics. Government should stay out of the way and allow the markets to make the necessary economic corrections. As things turned out the invisible hand of the market could not get a grip on the problem and things went from bad to worse.
This famous photograph entitled Migrant Mother by Dorothea Lange became an iconic symbol of the human suffering caused by the great depression.
In Germany a desperate nation responded to the seduction of Adolph Hitler and the Nazis. They adopted the economic regime of National Socialism which relied on strong government controls and rigid protectionism or autarchy in foreign trade. In the US Franklin Delano Roosevelt became president and launched a program he termed the New Deal. He and his political allies were described as liberals to differentiate them from the conservatives of prior Republican administrations. However, for the purposes of this historical overview, it is useful to link them and the programs they developed to similar efforts in other nations and group them all under the heading of social democracy. That is the term I will use in contrasting them with neoliberalism.
John Maynard Keynes was a British economist who developed important theories that proved useful in managing the problems associated with the Great Depression.
Unlike his neoclassical predecessors, he saw a constructive role for government intervention and management of the economy. He advocated the use of fiscal policy in addition to monetary policy. One of his primary prescriptions for recessions/depressions is the use of deficit spending to stimulate economic demand. Basically his ideas got tried because the old ideas weren't working and people were desperate. Many of them proved to be effective tools in that situation.
During the 1930s there was never a full commitment to Keynesian management. What basically happened was that the economy was stabilized with some mild recovery. Governments then back peddled and things tended to slide back into recession. World War II is what fixed the Great Depression. It provided the political motivation to engage in massive government spending and crank up industrial capacity to maximum performance. There was work available for everybody.
It also required a very firm and visible hand of government control over the economy and its management. Keynesian theory proved to be very useful to this task.
At the end of the war the US emerged as the global hegemonic economic power. Ft Knox held 3/4 of the world supply of monetary gold. The industrial capacity of the rest of the world was in shambles. The US was prepared to and the rest of the world was willing to let it assume a role of economic leadership. The Breton Woods conference established a system of international financial management. Shortly after the US initiated the Marshall Plan to restore the war damaged economies of Western Europe. It was also offered to the USSR, but they turned it down. The stated intent of all this was to export the New Deal to the rest of the world. This represented a new international political regime of social democracy and an economic paradigm of a synthesis of Keynesian and neoclassical economics.
Shortly after the war an anti-Keynesian movement began to develop in academic circles. Two of the important proponents of this critique were Friedrich von Hayek of the Austrian school and Milton Friedman of the Chicago school. They began to develop theories guided by the principles of neoclassical economics. They and their associates produced work that can be regarded of the birth of neoliberalism.
A better known postwar development was the emergence of the cold war. Much of the world became divided between western capitalism and eastern communism. The west generally operated under the social democratic/Keynesian tent. The Labour Party under Clement Atlee came to power in the UK and instituted the British welfare state. Governments in Western Europe generally followed patterns of social democracy. Even when more conservative parties such as the Republicans under Eisenhower and Nixon and the Torries under Churchill/Eden/MacMillan came to power they were generally inclined to leave the social democratic programs in place.
The 1950s and 1960s were generally a period of economic calm. Recessions were fairly mild and of short duration. This pattern was often credited to the power of enlightened economic management. The 1970s brought the world up against a new form of economic crisis, stagflation. Previously economic cycles had followed a pattern of prosperity with low unemployment coupled with a risk of inflation to be followed by recessions with high unemployment with a risk of deflation. The new crisis presented a picture of very high inflation that seemed to create economic stagnation and high unemployment. It created a very crippling situation. A similar pattern prevailed in the UK where there were recurring strikes demanding wage increases in response to the inflation.
The governments of Jimmy Carter and James Callaghan both attempted to us essentially Keynesian solutions of government intervention to deal with the problem. Wage and price controls were instituted to deal with the inflation and government spending was increased in an effort to stimulate employment. These efforts were unsuccessful. The growing neoliberal chorus grasped at the situation as an indictment of social democracy and the Keynesian synthesis. The problem was ultimately dealt with by a monetarist approach. Carter appointed Paul Volker as chairman of the Federal Reserve. He adopted a very rigorous tight money policy raising interest rates again and again. It squeezed the inflation out of the economy and created a recession. Margaret Thatcher came to power in the UK and adopted similar monetarist policies.
It was the stagflation crisis that provided the emerging neoliberal movement with an opportunity to get their foot in the door. It created political crises that brought the conservative governments of Ronald Reagan and Margaret Thatcher to power. Both of these governments adopted neoliberal policies and installed neoliberal ideologues in positions of influence. Tomorrow we will look at how the world has evolved from there.