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Economy: Europe Finals
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Lecture notes of 45 pages for the course Economy: Europe at UL (Lecture notes 7-12)
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L7: 1970s Crisis - From Keynesianism to NeoliberalismGlobalization Neoliberalism Keynesianism
● Neoliberal ● Related to the Supply Side ● Related to demand side economics
● Free movement of ● Thatcher ● When there's a downturn in the
capital ● Small government: governments only economic cycle --> most efficient
● Free movement of hinder companies way is for the government to step in
labor ○ Believe national governance is a and spend
● Free trade hindrance ● Pro-government
● No trade restrictions ○ The market is always right ● Countercyclical spending
● Effectively – no ○ Any government is less efficient ● Stimulate the economy > Spend us
borders for people, than the government out of growth
goods, or products ● Anti-Keynesian ● Concerned with full employment,
● Both sides of the ● Monetarist less so about inflation
political spectrums ● Pro-business ● Seen as ‘pro people, pro unions,
like immigration = ● Does not worry about full employment pro-jobs’ > Compatible with the
cheap labor = more + Is antithetical to unions Welfare State (ex: pensions)
growth ○ Believes in fighting inflation ○ Don’t care about inflation for
● Form of Ricardian rather than unemployment the average worker; care only
theory ○ Is seen by the left as ‘cruel’ or for capitalists
● EX: NAFTA, WTO heartless ● Has proven useful in recent crises
● Pro-globalization, because pro (2008 in US, Covid around the
efficiency world)
● By the right as efficient, realistic,
promoting maximum growth, and thus
wealth for all
Supply Side Economics Demand Side Economics
● another term for Neoliberalism ● Another term for Keynesianism
● concerned with making sure that ● focuses on the ‘demand side’ of the
suppliers can do their jobs macroeconomy
● They can efficiently bring maximum ● concerned with giving people
goods to the market money so they can spend
○ This means, they oppose ● governments make transfer
government regulation payments during crises
○ They oppose taxation ○ stimulates businesses and
○ These things add cost to firms’ people to spend
bottom lines and increase the ○ And to hire more people >
cost of everything in society leads to more jobs > lowers
● This can lead to inefficiency, and unemployment
bloating, and low productivity and ○ And ‘spends’ the economy out
de-incentivizes entrepreneurialism of a crisis
● It is concerned with keeping inflation ● How to increase growth (when it
low, because this is also a cost on comes to supply)? increase supply
business (efficiency) and increase demand
● It is less concerned with ● Argue that consumer spending
unemployment, it is seen as a ‘pro incentives people to spend
business’ policy ● Goal: maximize employment
● Cares about the consumer (the
worker's class especially - like the
Marxist ideology) + the
entrepreneurs
,Paradigm = Determines level of prosperity
Today’s Lecture:
● Stagflation crisis of the 1970s + shift from the Age of Keynesianism (roughly 1935-1980)
● Towards the Age of Neoliberalism (roughly 1980-2016?)
● Background: ‘Golden Age’ of Capitalism in Europe (roughly 1950-1970)
○ Keynesianism > rapid rise + solidification of the European middle class
■ Was it because of Keynesianism redistributed? Did GDP grow too fast?
■ Everyone believed they were living in a classless society
○ Keynesianism got stuck in the crisis of the 1970s → People thought that
Neoliberalism was the only way out of the crisis
● 1980s+: Neoliberalism has gained increasing ground and economists believed that
Keynesianism would always lead to stagflation
○ Keynesianism was very out of fashion
○ Problem: inequality grew under Neoliberalism (seen as toxic)
○ Globalization eroded middle-class security
● 2010 + 2016: working-class + middle-class voters stop voting for mainstream political
parties (which are mostly globalist and neoliberal - UKIP) → fringe parties.
The Welfare State and Keynesianism
● After WWII (Attlee): W.E. countries adopted welfare states ‘cradle to grave’
● Embraced Keynesianism > FOCUS: maintain full employment
○ They nationalized many jobs
○ They provided free housing to all who needed/wanted it
○ They gave massive power to unions to influence industrial policy
● Created a ‘Golden Age’ of capitalism > high growth + growth of a strong middle class
The Golden Age of Capitalism
● High growth rates (1950s and 60s)
● Welfare State ensured that growth was enjoyed by all, not just the rich
● Did Keynesianism cause this growth? Probably not → this was a fluke
○ A time of unprecedented (and unrepeatable) technological opportunities
○ Society became ‘electrified’ → consumers rely on electric appliances →
Labor-saving devices had several effects
○ Everyone spending on durable consumer goods → Manufacturing sales, rise in GDP
● Employed many people working in these sectors
● End of ‘classism’ → people did not need servants
○ Wages increased, servants became more expensive and even upper-middle-class
wives began to do more housework (30s, 40s, 50s)
○ Europe moved towards being a ‘one class’ society
○ 1960-70s: pill + tech. +educational opportunity freed women to join the workforce
,● Culture of the 1960s (hippie culture – a middle-class culture): why can’t we all get along,
be one big loving family, etc., reflecting the economics of class equality
○ extension of family vacationing → increasing numbers of families went abroad
○ Dutch paychecks were structured around vacations
Why did Europe become a ‘one class’ society, with most people being middle class, by the
1960s? How did the majority of households capture so much of the wealth?
● Neoclassical Economics: GDP Growth was very high
● Piketty equation: r > g and/or g > r (capital vs growth)
○ How much do you need in the bank to earn 100,000 euros in investments?
○ Depends on the rate (let's say: 5%)
○ Then you need 2 million in the bank (in capital) to earn that amount of returns
○ The equation argues that the rate of return normally is larger that the growth
○ Age of capitalism: GDP growth was outstrict the rate of return and that’s why the
middle class grew
● Keynesians: Because of the New Deal and Welfare State, which facilitated transfer
payments
● Some theorists: Because of electrification Or, because of war destruction Or, because of
no Communist competition
○ Likely it was a combination of these factors, but this is one of the most fundamental
questions for any politician or policymaker to ask, and the answer is very important
An example of Piketty's graph: rich was getting richer faster
than the poor was getting richer → WEALTH DISPARITY
● 1950-2012: growth rate (G) is above the adjusted (R) >
reason behind why the middle class grew
● The monopoly era = before 1980s
○ Average worker cant afford basic needs
○ Welfare state
● After 1980s: stopped redistributing wealth
Why did the period of Keynesianism come to an end, especially if this was a major cause
of the growth of the middle class? Did it have to end, like Thatcher and Reagan believed,
and New Labour continued to believe? What were possible alternatives?
● 1945-1980: massive growth + Massive increase in prosperity
○ Unbridled Keynesianism, even when “Conservative” candidates believed in big
government
● The standard economic answer now is that too much Welfare State
● Too much Keynesianism → there was too much inefficiency in the economy
● People were not incentivized to work
● Government jobs are done in a non-competitive environment
, ● Worker productivity is thought to have been low (though it was relatively high)
End of Bretton Woods Currency Regime
● Later 1960s: signs of a general economic slowdown
● The US experiences a stock market crash in late 1968 → USD begins sliding against
European currencies
● It is the global reserve, and since European currencies are pinned to the USD, if
Europeans stay in the Bretton Woods system, they will have to 'Import inflation’
○ Increases in the prices of imported fuels, materials + increase domestic costs of
production and lead to increases in the prices of domestically produced goods.
Nixon Shock
● 1971: Germany left the Bretton Woods system → Didn’t want to devalue DM
○ Deutschmark began to appreciate against the USD
● US left Bretton Woods → allowed the dollar to float against gold + other currencies →
‘Nixon Shock’ → USD devalued → spark → inflation (happened across Europe)
○ HOW? currencies were allowed to float → tendency to increase the money supply
Monetary Fluctuation
● Various attempts to try and keep global currencies aligned
○ Smithsonian Agreement (1971): attempting to keep currencies within a band of
2.25% (away from USD) → US agreed to devalue USD against gold
○ 1972 → This is seen as unworkable, and the six (BEL, GER, FR, IT, LUX, NL) + three
members of the EEC (UK, IR, DK) decided to align their currencies in a more narrow
‘Snake in the Tunnel’ > currency values would fluctuate within a narrower band
against each other > promotes exchange rate stability within the EEC
○ 1973: USD allowed to float even more freely, and the Snake had to be abandoned
● The recession of 74-5, delayed further action until a 2nd recession in the later 1970s
resulted in a new European Monetary System (1979)
Crisis of the 1970s
● Few analysts focus on the destabilizing of the Bretton Woods currency regime as a
major factor precipitating the crisis of the 1970s
● What was the Crisis of the 1970s? (A turbulent decade)
○ Punk rock; continuing student riots Urban unrest of various kinds
○ A sense that economic opportunity was declining again (not seen since the 1930s)
● Currency instability was bad
● Then came the exogenous negative supply shock brought about by the Yom Kippur War
○ 1973: Israel defeated several neighboring states who had attempted a coordinated
attack, and occupied some of their territories
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