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

Regulated capitalism:

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: Latin American countries borrowed to import machinery and subsidize industries, but by the 1980s, high global interest rates increased the cost of borrowing and the debt burden increased

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

New Deal Immediate Relief Programs

Public Works Program, Tennessee Valley Authority, WPA, Civic Works

New Deal: Financial Regulation

Glass-Steagall separates investment and commerical banking, FDIC established, National Housing Act, Farm Credit Act

New Deal: Industrial/Employment Regulation

Wagner Act 1935: unions and collective bargaining

New Deal: Taxes

Social Security Act (1935), Revenue Act taxing wealthy (1935)

Sweden New Deal

Agriculture sector support, public works, wealth tax, bank reform, collective bargaining, unemployment insurance

New Deal: A Success?

Interruped by 1937 recession, WWII production helped recovery

Bretton Woods: Beginning

1930s off gold after Britain does in 1931, devalued currency and implement exchange controls

Bretton Woods: Setup

UN financial conference (1944): postwar discussion to provide stability and flexibility

Bretton Woods: White Plan

Promoted international sphere, fixed exchange rates, ban of exchange controls, trade and capital account liberalization, international organization supervision

Bretton Woods: Keynes Plan

sheltered national sphere, adjustable exchange rates, capital and exchange controls, sharing burden of adjustment between deficit and surplus countries

Bretton Woods: Agreement

Adjustable peg, currency convertibility, capital controls, IMF and World Bank creation

IMF

29 initial members, voting depends on quotas met, advises governments internationally

Bretton Woods In Practice

USD pegged to gold, others pegged to USD, full convertibility only achieved in 1959, IMF lacked funds to deal with current account deficits

Bretton Woods: Marshall Plan

Recovery system instead of IMF funds, reconstruction of Western Europe 1948-1952

Bretton Woods: Outcomes

International monetary stability, continuing but shifting trade imbalances, few sovereign debt crises

Bretton Woods: Not a durable solution

US current account went negative, gap between foreign dollar holdings and US gold reserves (U.S. didn't have enough gold to back all those dollars at the promised rate), Triffin Dilemma: tension between USD as national and world currency

End of Bretton Woods

1971 Nixon ends gold to USD convertibility, 1973 devaluation of currency and shift to floating rates

Bretton Woods: After

Flexible exchange rates, currency value depends on supply and demand, central banks intervene to adjust currency value

Bretton Woods: Keynes Alternative

global currency (bancor), each nation has account with International Clearing Union (ICU), penalize surplus and deficit countries to keep balance, countries with persistent imbalance must de/appreciate currency