POST-W
AR
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T
he years immediately following World War II were, inevitably, a time for rebuilding economies. Even before the end of the war, politicians and economists had started planning for peace. They were working to avoid the problems that had followed World War I and to establish a peaceful world of international economic cooperation.The League of Nations, an international organization set up to maintain peace, had collapsed at the beginning of the war, and in 1945, it was replaced by the more robust United Nations (U.N.). One of the U.N.’s first tasks was to vote on proposals drawn up by delegates to the U.N. Monetary and Financial Conference, now better known by its location—Bretton Woods, in New Hampshire. Here, delegates from the
Soviet Union, the UK, and the US agreed on the founding of major new institutions, such as the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), and the General Agreement on Tariffs and Trade (GATT).
Post-war Keynesianism
The British delegate at Bretton Woods was John Maynard Keynes (p.161), whose 1919 book, The
Economic Consequences of the Peace, had warned what might
happen after World War I as a result of economic policy. Keynes’s work had inspired President Franklin D. Roosevelt to lift the US out of the Great Depression of the 1930s by the state spending package of the New Deal. It was not surprising that his ideas were equally
influential after World War II. In the US Keynesian policies were enthusiastically advocated by economists such as Canadian- American John Kenneth Galbraith and quickly adopted by the liberal democratic government. In Britain the incoming Labor government brought in measures that set up a welfare state. The rebuilding of the economies of Japan and Germany was to mark a turning point in their histories. Germany, in particular, experienced an “economic miracle,” the Wirtschaftswunder, under Chancellor Konrad Adenauer. The success of their social market economy, tempering free market economics with government intervention, became the model for many Western European economies in the second half of the 20th century.However, other
INTRODUCTION
1945
1949
1949
1951
1950
S1951
1953
1953
1955
Milton Friedman advocates a monetarist policy, in which governments limit the money supply.General Motors
becomes the first US company to make a
profit of more than $1 billion in a year. The People’s Republic of China is founded, led by the Communist Party. Maurice Allais presents a paradox in decision making that
shows how people hate losing more than they
like winning. Konrad Adenauer
starts to build Germany’s social market economy,
with large private and public sectors. The International
Monetary Fund
is put in place, operating from a base in
Washington DC. Mathematician John Nash pioneers game theory, which is used to explain economic decision making. János Kornai’s Overcentralization gives a critical analysis of the planned economies of communist states. Kenneth Arrow’s impossibility theorem shows that there is no perfect voting system.
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countries were not moving along the same lines. Much of Asia was under communist rule, and the Iron Curtain now separated Europe into East and West. This was the era of the Cold War between the Soviet bloc and the West. The spread of communist regimes prompted a reaction among many economists in the West, especially those with experience of their tyranny.
Free market revival
Influenced by Austrians such as Ludwig von Mises (p.147) and Friedrich Hayek (p.177), the US’s Chicago School of economists took a conservative stance against the prevailing mood of Keynesianism. They advocated a move back to a free market system with less government interference. The roots of this idea lay in the neoclassical
economics of the turn of the 20th century, which focused its analysis on supply and demand. Economists of the Chicago School turned to science for inspiration. Kenneth Arrow (p.209) used mathematics to prove the stability and efficiency of markets, and Bill Phillips (p.203) used ideas from physics to describe the trade-off between inflation and unemployment. Some Western economists, such as Maurice Allais (p.195), introduced ideas from psychology in the 1950s and 60s. This inspired new models of decision making that challenged the belief in “rational economic man” first described by Adam Smith.
Huge advances in communication technologies made the world seem a smaller place during the post-war decades, and economists became more aware than ever before of the
international nature of economics. Although the US and Europe still dominated economic thinking outside the communist states, more notice was being taken of the developing countries, not just as a source of raw materials but as economies in their own right.
Globalization continued apace, and economists began to examine the reasons for the gap between rich and poor countries, and how this could be narrowed. Ideas for development moved from capital investment to debt relief, but it became clear that the problems were more complex, involving politics, culture, and economics. At the same time economists began increasingly to suggest that perhaps economic prosperity was not the only—or even the best—way to measure a country’s well-being. ■