Keynes vs. Hayek = State intervention vs. free markets
John Maynard Keynes:
After WWI, Keynes wrote "The economic consequences of the war". His inspiration was the Treaty of Versailles (1919), signed between the allied and associated powers and Germany + Austria.
Consequences for Germany:
* Hyperinflation (Germany printed more money in order to pay unbearable was reparations);
* Hyperinflation wiped out the savings of the middle class that supported Hittler later on;
* Hitler became chanceler in 1933.
At the same time in the US:
* At the same time (the 20s), America was living a period of prosperity (jazz, radio, people were buying a lot of stock ans spending a lot of money).
Stock Market Crash of 1929:
* The bubble burst, prices plunged, people rushed to withdraw their savings (oct 1929);
* Then, Americans had no ability to spend and to consume;
* Industry and even banks broke (nearly half of the banks in the US);
* Unemployment.
Putting things in order (Keyne's ideas began to gain ground):
* Keynes aimed to rewrite the economic rules ("General Theory");
* Roosevelt was the president at that time.
* New Deal - programs to put people back to work. Americans started to built dams and national highways. The government set rules to the industry (to put things in order);
* With WWII, the US pumped money into the war effort;
* High unemployement ended.
After WWII:
* Brettom Woods (goal was to organize the postwar economy).
In the UK:
* During WWII, Britain had been governed by a coalition of conservatives and socialists. Churchill, then the head of the Conservative Party, expected an easy victory, but the Labour Party won. Attler wanted to "built Jerusalem in England".
* Private owners were compelled to sell their business;
* The Labor Party created a sort of mixed economy in which newly nationalized industries coexisted with private enterprises.
India:
* Independence (1947) - Gandhi;
* Pandit Nehru was the first prime minister;
* He wanted to industrialize the country combining Soviet's style central planning and British parliamentary democracy;
* Public sector must occupy the commanind heights of the economy (read Lenin below);
* Mahalanobis' model was adopted for planning mixed economies;
* India became the model for newly independent nations.
In Britain:
* During WWII, Britain had been governed by a coalition of conservatives and socialists. Churchill, then the head of the Conservative Party, expected an easy victory, but the Labour Party won. Attler wanted to "built Jerusalem in England";
* Private owners were compelled to sell their business;
* The Labor Party created a sort of mixed economy in which newly nationalized industries coexisted with private enterprises.
Messing it up again (end of Keynesianism):
* After "30 Glorious Years" with high standards of living, the world was beginning to change;
* Inflation and unemployment were raising at the same time (stagflation);
* Keynesianism sounded like central planning;
* Nixon insisted on wages and prices control (cause prices were going up, but they kept on rising)
* England's economy was in similar trouble (prices control);
* America lives its worst downturn since 1929 due to an Arab oil embargo followed the Yom Kippur War (OIL CRISES OF 1973);
* In Britain: Keith Joseph suggests a change in the way the world thought about economy and society. He started to rethink conservative policies.
* Creation of the Institute of Economic Affairs (had influence of Hayek's ideas);
* Pro-free markets (it was necessary to attack mixed economy and make the case for capitalism);
* Joseph deffends more risk taking (what would end up in more bankrupts and less equality);
* Margaret Thatcher (Joseph's most significant adherent).
Friedrich von Hayek:
* Inflation is an evil that corrodes society and undermines democracy (the fight against inflation became the cornerstone of his philosophy);
* "The roads to Serfdom": too much government planning = too much government power, which undermines freedom and makes men slaves. Central planning was the first step to a totalitarian regime.
* Hayek was against state intervention even during the the great depression.
* Hayek influenced politicians such as Churchill and Thatcher.
Turning point (free markets):
* By 1974, the world began to go his way (Hayek won the Nobel Prize).
In the US
* Airline deregulation took place (competition was necessary) - Freddie Laker vs. Pan AM = as the tickets prices went down, demand grow up;
* Jimmy Carter - start deregulating US economy;
* Carter loses and Ronald Reagan is the new president (if not now, when? if not us, who?);
* After a big change, recession is necessary to put things in order. It lasted 3 years in the US. By 1982 inflation was not a problem;
* Reagonomics (Reagan and Volcker): sound money, deregulation, modest tax rates and limited government spending;
* Reagan's tax cuts, the biggest in history, led to huge deficits but the economy began to grow steadily again.
In Britain:
* Changes come under Margaret Thatcher's government;
* 1982 - Falklands Islands (Argentina had seized the islands from Britain);
* Victory guarantees the survival of Thatcher's government. Before, her popularity was low;
* Privatization (the commanding heights of the economy) - "they have access to the government purse";
* Thatcher vs. National Union of Miners = capitalism vs socialist or free-markets vs. central planning;
* Strikes (the winter of discontent).
Ludwig Von Mises:
Predicted that the new Soviet economy would never work because wages and prices were controlled by the government. They are fundamental because they send signals to consumers and producers as to what something is worth. According to him, free markets do it best.
Vladimir Lenin:
To avoid a economic disaster (caused by fixed prices and wages), Lenin instituted the New Economic Policy. Now, farmers could sell their own goods, own their own land and small business would be able to operate. It worked out. However, he was severely criticized by the left for selling out the principles of Marxism and those of Bolsheviks. He replied saying that their critics were fool because the state would remain controlling the commanding heights of the economy, that is, steel, railroads, coal and heavy industry.
Joseph Stalin:
Introduced central planning (the state would control every single aspect of the economy).
While communism seemed to be forging ahead, capitalism looked to be doomed.
Milton Friedman, Ludwig Erhard (give up all prices control)
Erhard was Minister of Economics in Bavaria for the American military administration and then Director of Economics by the Bizonal Economic Council. He was responsible for the introduction of the Deutsche Mark (1948). Erhard abolished the price-fixing and production controls that had been enacted by the military administration.
Friedman, Chicago School of Economics (an advocate of laissez-faire capitalism)