Keynesian Economics, Post-War Welfare, and Soviet Planning: A Comparative Overview

John Maynard Keynes Key Contribution

Demand, not supply, drives the economy, challenging classical economics

Keynes Main Theories:

Supply does not automatically create demand.

Interest rates don't inherently balance savings and investment.

Wage cuts do not guarantee increased employment.

Economic equilibrium doesn't ensure full employment.

Economic Leakages

Savings, imports, taxes.

Injections

Investments, exports, government spending.

Keynesian Demand-Side Economic Policies

Emphasis on low-interest rates, progressive taxes, welfare expansion, and anti-cyclical budgets to stimulate demand and stabilize the economy.

Treaty of Detroit

Established a formula where wages grew with inflation and productivity, promoting wage stability.

Productivity-Based Wage Bargaining Impact

Widespread real wage increases in the US and Europe from 1950 to 1975

Regulated Capitalism Tax Policies

Top marginal tax rates were high (50% - 90%), 1964 Revenue Act

1964 Revenue Act

Lowered the top rate from 91% to 70%, reflecting changing approaches to income distribution

UK Expansion of the Welfare State

Inspired by the Beveridge Report, introducing comprehensive welfare post-WWII

US Expansion of the Welfare State

The Great Society program aimed at reducing poverty and racial injustice

Coordinating the Economy

Economic Planning (France), Social Partnership (Austria), and Co-determination (Germany) served as strategies for balancing economic interests and stabilizing growth

The Golden Age of Capitalism Characteristics

High and stable GDP growth, low unemployment, increasing wages, and relatively high equality

End of the Golden Age

1970s: Slowing productivity.

Diminishing effectiveness of Keynesian policies.

Economic exclusion of some social groups.

Primary Export Model

Before 1930, economic growth in the Global South relied on exporting raw materials: vulnerable to price drops

Shift To ISI: Prebisch-Singer Thesis

While demand for raw materials remains constant, demand for manufactured goods grows, leading to a trade deficit for raw-material-exporting countries

Solution to Prebisch-Singer Thesis

Industrialization: producing their own goods, reduce dependency

ISI Policies and Tools

Protectionism, foreign investments to industrialization efforts, tax exemptions for industries, high exchange rates for cheap machinery imports (contradictory), public ownership of important sectors, low interest rates to encourage borrowing and investment

Mexico's Economic Miracle (1956-1970)

Substantial economic growth: rising productivity, GDP, real wages

Mexico's Economic Miracle Policies

Protectionist Policies: High tariffs, strict import licenses, and requirements for domestic content in products

Outcomes of ISI

Economic Growth: Sustained growth, especially between 1950 and 1980.

Shift to Manufacturing: Manufacturing became a larger part of the economy.

Job Creation: Stable employment in large companies, though informal work persisted.

Rising Living Standards: Particularly in urban areas, with decreasing poverty but persistent inequality.

Challenges and Failures of ISI

Inward Focus: Limited exports led to current account deficits.

Inflation and Debt: Inflation and rising interest rates caused borrowing costs to soar. Latin American debt surged from 20% of GDP in 1974 to 60% in 1984.

Debt Crisis: By the 1980s, high debt levels forced countries to seek help from the IMF and World Bank, which imposed structural adjustments.

Marx's Concept of a Planned Economy

He criticized capitalism but didn't provide a detailed model for an alternative economy.

Marx's Hints of an Alternative:

Abolishing private ownership of production.

Centralizing production in the state's hands.

Replacing market-driven decisions with central planning.

Socialism in One Country (USSR) Early Economic Shifts:

October Revolution in 1917 and the War Economy (1918-1920).

New Economic Policy (NEP) (1922-1924): Allowed small private businesses and markets.

Central Planning USSR Beginning

the first 5-year plan in 1928

Planned Industrialization: 5-year plan

Heavy industry investments at a high human cost, particularly in rural areas, focus on producer goods

Characteristics of Soviet Planning

Hierarchical planning, fixed prices, labor allocation and fixed wages

Challenges in Soviet Planning

quantity over quality, hoarding led to shortages, soft budgets led to wastage, misinformation, mis-planning

Balance Sheet of Soviet Planning

GDP doubled from 1950-1980, increased job security, health care and free education, but shortages and low living standards, growth slowdown mid 1970's

Reasons for the Failure of Soviet Planning

lacked structural change, consumer dissatisfaction, worker disillusionment, arms race strained resources, but post-soviet economy not much better