Economic History: The Oil Shocks and the New Economic Order (1973-2000s)

GDP Trends and International Comparisons (1950–2013)

Definition of International Dollars: * International dollars are a hypothetical currency unit used to facilitate meaningful comparisons of living standards and monetary indicators across different countries and eras. * Figures are adjusted for inflation within countries over time and for differences in the cost of living between countries. * The primary goal of Purchasing Power Parity (PPP) adjustments is to hold purchasing power fixed; thus, one international dollar can buy the same quantity and quality of goods and services regardless of the location or year of spending.
Long-Run GDP Growth (1950–2000): * Data adjusted for inflation and living costs (2011 international dollars) shows a steady upward trajectory for the United States, France, Germany, Italy, and the United Kingdom. * The United States maintained the highest GDP per capita throughout the period, reaching approximately $50,000$ by the year 2000.
Per Capita GDP Growth Rates and Convergence (1973–2013): * Average Annual Growth Rates (1973–1995): * United States: $1.8\%$ * Japan: $2.5\%$ * Ireland: $3.4\%$ * Spain: $2.4\%$ * Note: This period saw significant growth in Japan and Ireland. * Average Annual Growth Rates (1995–2006): * Ireland: $6.0\%$ * Greece: $3.8\%$ * Spain: $3.6\%$ * United Kingdom: $2.5\%$ * Japan: $1.0\%$ * Average Annual Growth Rates (2007–2013): * This period highlights the impact of the Great Recession, with negative growth in many nations. * Ireland: $-2.8\%$ * Greece: $-1.4\%$ * United Kingdom: $-1.0\%$ * Spain: $-1.1\%$ * Germany: $1.4\%$ * Income Levels Relative to the U.S. ( $\text{US} = 100$ ): * Austria: Increased from $67$ in 1973 to $85$ in 2013. * Ireland: Rose drastically from $46$ in 1973 to a peak of $97$ in 2007, before dropping to $87$ in 2013. * Japan: Rose from $69$ in 1973 to $80$ in 1995, then declined to $69$ by 2013. * Spain: Rose from $52$ in 1973 to $68$ in 2007, then fell to $63$ in 2013.

Structural Economic Changes and Inequality

Deindustrialisation (1970–2003): * All G7 countries experienced a significant decline in the share of manufacturing in total employment. * United Kingdom: Experienced one of the steepest declines, dropping from over $30\%$ in 1970 to approximately $10\%$ by 2003. * Germany: Maintained the highest manufacturing share among the group but still saw a decline from nearly $35\%$ to around $20\%$ * Japan: Remained relatively high compared to the UK and US, hovering around $20\%$ by the early 2000s.
Long-Run Inequality Trends (Pre-tax income share of the richest 1%): * U-Shaped Trend: Observed in the United States, United Kingdom, Canada, and Italy. Inequality decreased significantly from 1910 through the 1970s but has risen sharply since 1980. * L-Shaped Trend: Observed in Japan, Spain, France, Sweden, and the Netherlands. Inequality fell from 1910 to the 1950s/60s and has since stabilized at lower levels than the early 20th century, without the aggressive resurgence seen in the U.S.

The End of Rapid Growth: Exhaustion and Oil Shocks

Core Causes for the Stall in European Growth:

Structural Factors: The exhaustion of the "Golden Age" model.
Short-term Trigger: The global oil shocks.

Elements of Model Exhaustion: * Productivity Slowdown: * Technological catch-up with the U.S. was largely completed. * Structural change (the shift of labor from agriculture to more productive sectors) was completed. Agricultural employment in France, the Netherlands, and the UK fell to near-zero levels by the 2000s. * Exhaustion of the second Industrial Revolution innovation wave (internal combustion, mass production). * Emergence of Zero-Sum Conflict: A conflict re-emerged between wage demands from workers and the maintenance of corporate profits.
The End of Bretton Woods (1971): * Cause: U.S. balance of payment deficits and the proliferation of international financial transactions. * Context: Pressures from the Vietnam War (1955–1975) and policies under Richard Nixon (1969–1974). * U.S. Goods Trade Balance: Significant drop from a surplus in the mid-20th century to a persistent deficit starting around 1970 (Average 1970–2018 is roughly $-4\%$ of GDP). * Consequence: Increased exchange-rate volatility leading to short- and medium-term balance-of-payments uncertainty.
The Oil Shocks: * Vulnerability: Modern industrial economies were heavily dependent on cheap energy supplies. * 1973 Shock: Triggered by the Yom Kippur War. * 1979 Shock: Triggered by the Iranian Revolution.

The Stagflation Crisis and Policy Shifts

Characteristics of Stagflation: * Definition: A period where inflation and unemployment rise simultaneously while GDP falls or stagnates. * Contrasts with the standard Phillips curve logic, where there is typically a trade-off between inflation and unemployment. * Expansionary policies in the 1970s worsened inflation without solving unemployment or stagnation.
Shift in Economic Policy (Late 1970s–Early 1980s): * Volcker Shock (1979–1982): Implementation of highly contractionary monetary policies to control inflation, even at the expense of high unemployment. * Differential Recovery: * Countries implementing wage rationalization and restrictive fiscal/monetary policies recovered earlier. * Countries resisting these adjustments recovered later. * The New Political-Economic Model: Symbolized by Margaret Thatcher (UK, 1979) and Ronald Reagan (USA, 1981). * Core Pillars of the New Model: 1. Anti-inflationary monetary policies. 2. Fiscal discipline. 3. Financial and labor deregulation. 4. Privatization of public companies and assets.

The Third Industrial Revolution and Globalisation

Technological Shift (ICT): * Focus on information management via electronics, computers, telecommunications, and robotics. * Enabled automatization and real-time coordination.
Energy and Production Logic: * Energy: Moving from oil dependence to diversification (nuclear, gas) and energy efficiency/savings (later renewables). * Production: A shift from Fordism (standardized mass production) to Post-Fordism (flexible manufacturing, shorter runs, quick changeovers, and high quality control).
Organizational and Labor Changes: * Firm Structure: Transition from vertical integration to vertical disintegration and outsourcing. * Value Chains: Creation of global value chains and specialized supplier networks (moving from a "pyramid" to a "network" structure). * Role of Labor: Reduction of routine tasks; increased requirement for specialized skills and services; rising pressure for flexibility in tasks, contracts, and location.
The Second Globalisation Expansion: * Measured via three indicators (indexed where $1900 = 100$ ): 1. Trade Openness: Goods exports to GDP ratio. 2. Financial Integration: Measured by current account disconnectedness (Feldstein-Horioka estimators). 3. International Migration: Migratory turnover divided by population. * While migration remained lower than its late-19th-century peak, trade openness and financial integration surged past 1900 levels toward the end of the 20th century.

Waves of Innovation (Kondratiev Cycles)

1st Wave (1785): Water power, textiles, commerce.
2nd Wave (1845): Steam power, railroad, steel, cotton, iron.
3rd Wave (1900): Electricity, chemicals, internal combustion engine, heavy engineering.
4th Wave (1950): Automobiles, mass production, aviation, space, petrochemicals, electronics.
5th Wave (1990): Digital networks, software, information technology, telecoms.
6th Wave (2030 forecast): Sustainability, artificial intelligence, renewable energy, green tech, big data analytics, biomimicry, Industrial Internet of Things, cloud computing.