World Economy Since 1945 - Essay Example

?World Economy Since 1945 Introduction The concept of neo liberalism has dominated the sphere of economic policymaking in the Western world. Both theUnited States and the United Kingdom has strictly adhered to the school of neo liberals since the past four decades. Neo liberalism finds strong advocates in all over Western Europe. However, strong popular beliefs regarding the negative effects of this school of economic thoughts have remained. The fall of the global economy since the 2008 financial crisis has led to the development of substantial popular resistance against neo liberalism. The US has made continuing efforts to introduce neoliberal policies on the third world countries, which are in the period of economic transition. It has been successful in achieving this objective and has received the support of the international bodies, such as, the World Bank and the IMF. According to common belief, neo liberalism refers to an up-gradation on the classical liberal economics. This classical liberal economics dominated majority of the UK and the United States before the Great Depression hit the world in the 1930s (Overbeek, 2003). A new approach started to enter the thought of economists since the mid 1930s, after the world faced the perils of liberal economic relations among market agents. This approach was considered interventionist and tended to strengthen by the 1970s, when it was termed as the neo liberal economic thought. Under this new economic theory, it was accepted that, significant state intervention is required in order to retain the strength and shine of capitalist form of production relations. Without state intervention, capitalist mode of production relation cannot be viable (Kotz, 2000). An overview: European Stagnation It has been argued that the euro zone crisis had occurred as a result of “a toxic neoliberal economic policy cocktail” (Palley, 2013). This cocktail was developed in 1980s when Europe had begun to put emphasis on the model of neoliberal economic theory. By embracing this theory, income generation reduced and demand creation was suppressed. This gave rise to wide income inequality. However, the problem of stagnation did not appear immediately with the changes in economic decagons making in the European countries. A number of initial economic developments during the late 1900s postponed the occurrence of stagnation. Among them, the most important incidence was the creation of the Euro. The common currency of the Euro zone countries led to “interest rate convergence” (Palley, 2013), which swelled up the asset price and eased credit availability facilities. This brought superficial prosperity in these economies owing to the asset price bubble. But, the fictitious boom in the economy actually worsened the stagnation by delaying it and building up large heaps of debts. These economies had followed a flawed system of monetary policies that caused the debt crisis. The neo liberal economic model thus prompted flawed economic growth pattern in the developed countries that had accepted this model during the 1970s and 1980s (Palley, 2013). Shift from Keynesianism to neo liberalism in Europe Europe was developing during the mid 1900s. However, after the 1945 there has been a major change in the pattern of economic growth of the countries in Europe. Towards the end of the twentieth century, average buying power of a European consumer increased by three times. The basic factors that stimulated economic growth were cohesive associations between employers and the employees, solidarity-centred trade unions and an overall growth oriented policies of the governments. These institutions were interconnected with one another and worked consistently towards mobilization of savings and stabilizing wages and improve the climate for financial investment (Parker, 2013). However, after 1973 Europe switched from Keynesian economic point of view to the neo liberal economic thought. According to Barry Eichengreen, it resembled a switch from economic development taking placed through natural process of investment to a course of development that particularly emphasized on efficiency in the production system. Neo liberal thinkers are of the view that efficiency is the key to sustenance of capitalist structure of development and the factors that are not efficient to meet the competition deserve to perish. This became the new problem of the era of liberalism (Eichengreen, 2008). The central question was that whether these new policy changes would be consistent with the-then economic situation of Europe. It was uncertain whether the institutional change would help the countries to adapt to “the needs of a globalized knowledge economy” (Eichengreen, 2008, p. 24). Eichengreen posed the question whether the distinctive history of the European continent would be lost in this process of modernization. The capitalist trajectory has spread to almost all countries, except China, after the 1980s. The major thrust is on adhering to free market policies and promoting globalization (Glyn, 2006). The Keynesian era came to an end in Europe during the 1980s and the neo liberal era began. The introduction of the new common currency, Euro in 1999, brought a new dimension to the institutional change in economic thinking that was initiated by the shift from Keynesianism to neo liberalism. A capitalist crisis followed the post-war period of political turmoil during 1973 (McBride and Lee, 2007). As a result there was slowdown in industrial productivity and reduction in overall corporate profits. Workers organized themselves which strengthened their position and enabled them to challenge their employers. Ripples of mutinies against the tyranny of employers started to take the form of big waves of industrial struggles. However, a counter-offensive action was also launched by the capitalist ruling class against working class. This was done to cut down the concessions implemented in the Keynesian era and to attack the trade unions in order to discipline the working class. Under the rule of Ronald Reagan in the United States and Margaret Thatcher in Britain there implemented a strong action against Keynesian model, which became famous by the name of ‘monetarism’. Subsequently, this field of economics broadened and became a new concept of ‘neo-liberalism’ characterized by the free-market. This is the seed of the formation of market society (Milberg and Heilbroner, 2008). The workings of the Keynesian model of growth have been illustrated by the figure depicted below. This model is known as the virtuous circle of growth that is based on full employment and stability of the wage rate. Wage rate is closely associated with rate of growth of productivity in the economy. This helped to maintain the level of full employment and also fuelled the level of demand. This incentivized investors to make further investments that drove productivity level in every sector supported by higher wages. Figure: The Keynesian “virtuous circle” growth model (Source: Palley, 2013) The neo liberal growth model was introduced after 1980, which replaced the Keynesian model. The most important changes in this model were as follows: the commitment made by the Keynesian model towards full employment was abandoned, commitment to keep inflation at a low level was discarded and most importantly the link between productivity growth and wages were severed. These changes in a combined manner gave a new dimension to economic theory. Therefore, wages were no more the driver of growth in demand. This was the root of the neo liberal economic thought. The principal effects of this new economic model were to “strengthen the position of business and unleash financial markets” (Palley, 2013) that would serve the interests of the class of business elites. It fundamentally lashed on the working class and weakened the position of the workers. Figure: Stages showing the euro zone crisis (Source: Palley, 2013) According to some experts, this institutional change in running the economy was based on two faulty paradigms; wrong institutional design (consisting of architectural faults in the creation of the Euro and the policies of the European Central Bank (ECB)) and erroneous neo liberal policy prescriptions (due to the German economic policy and the monetary policy system followed by the entire Europe) (Palley, 2013). It shows that the Euro zone crisis was an outcome of these policies and therefore it was practically unviable to control the spread of the crisis from within the neo liberal framework. Research results reveal that most of the countries that have been involved in the debt crisis have shown a long history of being responsible about the fiscal policies adopted by their governments. Among the GIPSI countries (Greece, Ireland, Portugal, Spain, and Italy) all members had shown “high degree of fiscal responsibility” (Palley, 2013) in all the years preceding the crisis. Despite fiscally responsible these countries plunged into budget deficit during the 2008 crisis. This implies that changes in the economic model had forced them to deficit (Hermann, 2005). Conclusion The transition towards neo liberalism casts the most terrible impact on the society in the long term. These effects are not visible in the short run since they occur in an imperceptible way. The effects are concealed although are potentially significant for the economy. The blatant example of this fact is the occurrence of the financial crisis of 2008. While the euro zone was under the illusion of a superficial prosperity brought by the asset bubbles, it gradually set the stage for an inevitable sharp financial downfall (Giroux, 2004). The social capital (consisting of social order and institutional financial processes) withers away at a slow but steady motion, which is not visible in the short run (Milberg and Heilbroner, 2008). The impact is faced in the long run if this erosion of capital is not sufficiently regenerated or renewed. Reference List Eichengreen, B., 2008. The European Economy since 1945: Coordinated Capitalism and Beyond. New Jersey: Princeton University Press. Giroux, H. A., 2004. The terror of neo liberalism: Authoritarianism and the eclipse of democracy. Virginia: Paradigm Publishers. Glyn, A., 2007. Capitalism unleashed: Finance, globalization, and welfare. Oxford: Oxford University Press. Hermann, C., 2005. Neo liberalism in the European Union. [pdf] Available at: < http://www.iaq.uni-due.de/aktuell/veroeff/2005/dynamo05.pdf > [Accessed 31 July 2013]. Kotz, D. M., 2000. Globalization and Neo liberalism. [pdf] Available at: < http://people.umass.edu/dmkotz/Glob_and_NL_02.pdf > [Accessed 31 July 2013]. McBride, S. and Lee, S., 2007. Neo-Liberalism, state power and global governance. Berlin: Springer. Milberg, W. S., Heilbroner, R. L., 2008. The making of economic society. New Jersey: Pearson Prentice Hall. Overbeek, H., 2003. The Political Economy of European Employment: European Integration and the Tran nationalization of the (un)employment question. London: Routledge. Palley, T. I., 2013. Europe’s crisis without end: The consequences of neo liberalism run amok. [pdf] Available at: < http://www.boeckler.de/pdf/p_imk_wp_111_2013 > [Accessed 31 July 2013]. Parker, O., 2013. Cosmopolitan government in Europe: Citizens and entrepreneurs in post national politics. London: Routledge. Read More