The Golden Years
After the conclusion of the Second World War the world economy experienced an unprecedented level of growth for nearly three decades. So much so that at the beginning of the 1970’s economists and governments believed that they could manage the economy through a natural rhythm of boom and bust using Keynesian economic principles[1]. By the mid 1970’s this was no longer true – many national economies all over the world were in disarray.
So how can the six principles of economics help to explain the golden years and help governments to recapture them?
Once again the answer is complex. What this period clearly demonstrates is the interrelatedness of economics. First consider the difference in the economic landscape pre and post the Second World War. We have already touched on the different skill mix in the workforce. Another key difference was the attitude toward government finance. During the worst years of the Great Depression, government financial management was considered to be the same as individual or corporate financial management. After the Second World War this was no longer the case. The widespread adoption of Keynesian economics brought about a widespread acceptance of government debt. Governments were also encouraged to embark on large projects. One of the consequences of this was that governments and government-related entities got bigger.
Another key factor was a change in social values. While future generations may question the social attitudes of the day, particularly in relation to race, gender, and cultural diversity, there was at the time a belief in working toward a greater good. It was this attitude that President Kennedy appealed to in his call for people to ‘ask not what your country can do for you, but what you can do for your country’. Many people had experienced the hardship of the depression years, the horror of the war years, and wanted to create a better life. In doing so they were, like our island girl <see appendix>, prepared to put more effort into today in order to have a better tomorrow.
What varied around the world was the circumstances that individuals and countries found themselves in. In war-torn Europe they were starting in survival mode, and working toward stability. In Japan they were confronted with a new paradigm as one form of stability (Imperialism) was replaced with another (American occupation). The victorious allied nations looked to redeploy a freshly trained mechanised military into a workforce for industry – often at the expense of women. Meanwhile more than half the population of the globe were transitioning from the relative stability of empirical rule to national independence in its many guises. These different circumstances would profoundly shape their individual circumstances and the economic ecosystems they found themselves in.
The contrast in circumstances for the USA before and after the Second World War was stark. It was physically, emotionally and financially transformed. It was in great shape while all of its nearest rivals were hurting. Britain, Germany, Russia, France, Italy, Japan and China were all in post-war trauma. With an intact industrial engine, skilled workforce and buoyed by new oil discoveries and a profound sense of optimism, the US economy surged ahead. Where the US led, others followed.
Many governments committed to large infrastructure projects and the adoption of new technologies. The widespread provision of power, water and sanitation were at the forefront. These were closely followed by roads, telephones, health and education. In many countries, some of the population had had some of these things for decades, but it was only after the Second World War that these things were regarded as common necessities. What also became apparent was the substantial improvement in living standards that these changes could facilitate. They became symbolic of the gulf between the third world and the developed world. In countries throughout the world, they represented a nationwide transition through the levels of need, from survival through stability to the pursuit of happiness.
Once people were able to elevate their lives above survival and a base level of stability, many questioned the type of stability they were being asked to adopt. The two dominant ideologies were communism and capitalism. Within each of these were variations in personal freedom and expression, reward for effort, and what was considered to be desirable. Throughout the developed world children born after the Second World War had a better standard of living than their parents.
So what brought about the end of the golden years and why have we been unable to recapture them?
The tipping point for the end of the golden years was the oil shock. In late 1973 OPEC orchestrated an increase in the price of crude oil and a reduction in supply. Within 12 months the price of oil had quadrupled. However, like the share market crash of 1929, this was not the underlying cause.
Cracks had started to show in Keynesian-based economic management in a number of countries for at least 10 years leading up to the oil shock. A key contributor to this was the way in which government debt was funded. A fundamental principle of the Keynesian model is that when a government is borrowing from its own citizens, government debt is a redistribution of funds, rather than an additional burden on the population. Similarly the Keynesian model assumes that the government funding will be spent to better effect for the citizens than had it remained with the rich. Towards the end of the economic golden age these fundamental principles and assumptions had either been forgotten or ignored.
In the post war years countries set about rebuilding and establishing the widespread provision of power, water, sanitation, roads, telephones, health and education. These projects underpinned incredible productivity growth and rise in standard of living. They were in effect a collective investment in the future. However much of this work was largely complete by the end of the 1960’s. Subsequently there was less for the government to do in this regard and it should have resulted in a natural decrease in government spending and employment. However speculative investment bubbles burst at around this time and the prescribed Keynesian response to it prevented this decrease in government employment from happening. In addition to having bloated government enterprise, governments bowed to political pressure to prop up ailing and inefficient industries to ‘save jobs’. Camouflaged by the Keynesian economic principles, governments moved from counter balancing the boom-bust cycle of business to spinning it into an inflationary spiral.
This was because the development of global financial markets had resulted in an increasing proportion of government debt being sourced from other countries. This meant that the government was no longer redistributing wealth within its community. Instead it was borrowing from other communities to enable its citizens to live beyond their means. By going down this path it also continued to feed the redistribution of relative wealth from the bottom to the top.
Recap
- Reward for effort – efficiency gains of technology and re-skilled workforce result in higher standard of living
- Value is relative – by collectively valuing tomorrow over today they were building for a better tomorrow
- Trade requires difference in value – when the rebuilding work was done, the effort needed to be redeployed, instead inefficiencies were propped up and institutionalised
- Money is a catalyst – by introducing external money to the community there was a surplus catalyst
- Trade creates economic ecosystems – international trade now significant factor in economy, nationalism distorts the ecosystem and creates long term problems
- Economic measurements are incomplete – move to pursuit of happiness changes economic levers, introduction of additional funding allows inflation and unemployment to coexist
[1] From Wikipedia, the free encyclopedia
Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; or Keynesianism) is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.[1]