End of Post World War II Economic Boom - Literature review Example

Name Professor Course Date End of Post World War II Economic Boom Introduction Economic boom refers to a period characterized by rapid expansion in economic activities, which result in higher Gross Domestic Growth, rising prices of assets and lowering unemployment. During this period, productivity, sales, wages, and demand in most sectors will increase. After the World War II, many nations, United States included experienced Post –World War II Economic Expansions or what is commonly known as the Long Boom. Although it had started after 1945, it narrowly spanned into the 1950s, with its overall growth lasting well in 1970s. However, there are those who believe that the period of other nations’ boom scenarios overlapped into the 1980s or 1990s, for instance, the East Asian economies (Suter 2). The spirited consumer demand in many industrial products, led to the boom in its manufacturing corporate. Most countries in Western Europe and East Asia experienced tremendously sustained and high economic growth, with nearly full employment. However, the optimism in it started waning in the 1970s, due to the rise in oil prices. This major cause of the post-industrial economic and social problems has ensued since then. Nevertheless, the decline in the prices of steel, due to competition from emerging countries led to steel producing belts such as Ruhr area in West Germany and the Rust Belt in North America to lack demand, resulting into the end of the long boom. Therefore, this discussion will explore some theories that explain why the long boom ended. To make the reader understand well the discussion, the paper will begin with events that led to its end, before embarking on the economic explanations of the scenario and ending with contrasts and comparisons between the explanations. Events towards the End of Long Boom As Suter (2-3) notes, the long boom started waning when Arab states had distanced themselves from the United States, as their weapons of isolating Israel. As members of the Organization of Petroleum Exporting Countries (OPEC), they begun by cutting oil supplies to America, which was followed by increased prices. The prices were increased at a percentage rate of 400. This strangely pushed the Western nations near to the edge and deep recession. In fact, there were alarming speculations in the media that the end of Golden capitalism had started. The mood of optimism capitalism was slowly being replaced by pessimism, especially after US had been defeated in 1975 in Vietnam War. At this point, the government’s fiscal tools could not work anymore, as economy was in stagflation. In the following years, the US debased its currency where extra dollars were printed to finance its war campaigns in Vietnam. What followed next was the abolition of the gold standards. This meant that currencies could now float against each other on the market, which marked the end of international financial stability. Transnational firms of the time could make big losses or gains, due to speculations that ensued in foreign markets. Towards the end of 1970s, most countries began to change their economic philosophies. Instead of businesses being ran by government, there were wide spread privatizations to keep them out of economic control. Most politicians of the time heeded the economists’ advice that privatization was more profitable. Although they were different form of governments in UK, US, Australia and New Zealand, their economic thinking was the same: less government intervention in business, smaller governments and widened reliance on the market (Suter 2-3). Explanations on the Causes of the Long Boom End The Keynesian Explanation/ Theory Keynes’s theory outlined that depression in a nation would emerge in attribution to factors such as savings, unemployment, and circular relationship between earning and spending. To achieve this, the government has a central duty to determine the destiny of its economy. For the purpose of this discussion, it will be important to concentrate on the role of the government in influencing the direction of its economy Robert Skidelsky (116).Keynes highlighted that the government will do this by controlling money supply, which can be done through the government selling or buying back its issued bonds and therefore altering interest rates. Therefore, the Keynesian economics puts the government at central position in controlling its economy, rather than waiting for market forces to improve its Gross Domestic Products (Brin, David, 2-5). The government spending will create aggregate demand for goods and services, when individuals are less willing to consume what factories produce. Its spending would also speed or use up the production capacity of firms that is idle. He theorized that this effect of government would have multiplying effects to the whole economy. This is because, when the production capacity of firms increases, many people will be employed and the employees will have more salary that they will spend in consumption, which will increase the overall GDP. On the other hand, Keynes also suggested that if the economy is heating up so fast, resulting in inflation/hyperinflation, the government is responsible to cut this. It can do it by reducing its expenditure and increasing taxes. According to Pettinger (2012.), the application of this theory can be witnessed with President Franklin Roosevelt, who felt that the notion of changing the US economy was very simple by that time. In his ‘New Deal’ the president employed more workers in public funded projects and provided jobs that enabled individuals to have demand for goods and services. After the World War II, some commentators note that the booming economies realized during this time were because of application of Keynesian policies. Through Keynesian model, most powers for instance, the UK through its chancellor Nigel Lawson had reduced the rates on income taxes. Analysts note the highest tax rate cut as low as 40 percent had simulative effects, which served to increase the disposable income of citizens so that they could have confidence in spending. This ultimately raised the consumers’ purchasing power and therefore economic growth. The governments also had removed restrictions on interest rates, which enabled borrowers to get money and acquire houses Pettinger (2012.), This created a booming housing industry that was realized immediately after the end of World War II. As noted, after the war, many businesses during this time were under the government control. Important to note too is that many imperialist families had a lot of businesses under their control abroad. As at that time, third world countries had started resisting domination by the former powers’ political bourgeoisies (Revolutionary Socialist Party, 2013). Therefore, government had to embark on some concessions to survive its foreign affairs. This clearly shows that through the thirty-year decades, the former colonial powers have been growing less powerful in controlling both foreign and domestic businesses. In fact, the parties that won in these countries during this particular time were neoliberal. For instance in 1979, Margaret Thatcher was elected as the first neoliberal politician in UK. (Suter, Keith, 2013). The striking themes of these governments were the same: having a small government that do not interfere with economic activities and relying more on the market than before. The government-controlled businesses in this capacity were to be sold off to private individuals. Nevertheless, the role of the government was only to provide training and development programs for its workers than owing a responsibility to employ them.Therefore, as it can be established, denying government power to be in central management of the economy went against Keynes’s explanation on the boom-burst phenomenon of the economy. For instance, in this case, instead of governments controlling their currencies they were left to float against each other. This reverse management of economy as advised by him has seen the economy being unmanageable. Most of government businesses were privatized, therefore, the demand the government could have created due to altering both monitory and fiscal policies could effectively not be possible Robert Skidelsky (116). Lack of aggregate demand would lead to less output being demanded from industries, the government earning little inform of tax and the whole economy experiencing recession. Connected to this, is the demand for steel that went down in industrialized nations during this time. The Supply Shock Explanation Commentators argue that supply shock could have been the main reason that caused the end of long boom. A supply shock occurs due to sudden changes in the prices of a product or a service. It generally occurs when there is an abrupt decrease or increase in the supply of a certain commodity. This will generally affect the equilibrium price. A decrease in the product will suddenly raise its price levels, shifting the aggregate supply curve of the commodity to the left. A negative supply will cause stagflation, which occurs when prices induce inflation as the output keeps falling. On the other hand, positive supply shock will lower the prices attributed to certain commodities, shifting the aggregate curve of supplies to the right (Suter, Keith, 2013). Technically, a move of aggregate supply from Y1 to Y2 while the demand is still the same depicts a negative supply shock. In this case, the initial equilibrium point is at A where supply on the market is Y1 at Price P1. When the shock occurs, there is a shift in aggregate supply curve to the left from AS1 to AS2. The demand being the same will have the demand curve remaining in the same position. The new equilibrium as result of reduced supply Y2 has moved to point B with Price P2. In the regard of the end of the long boom, as from 1973 when OPEC started the oil crisis, it resulted into the constrained worldwide supply of the input. The Organization begun by first, stopping the oil production which caused oil prices to increase by 400%. This resulted in the shortage of the input that pushed prices up. This oil shock started global stagflation. As a result, Central banks of various countries responded by relaxing their monitory policies which in turn caused a big runaway of wage price (Deardorff, 248) There was general shift in prices of goods and services and like other cases of stagflation, those actions such as monitory relaxations that were designed to lower the pain of price increase, spiraled and worsened into recession in some cases (Boundless par. 1-5). Taking into account that oil is key to transportation, it resulted in the rising of the prices of other goods, especially the industrial ones. Last but yet important, scarcity of oil is regarded as the main cause why industrialization slowed down in 1970s and hence economic recession. According to Robert Skidelsky (116).on American perspective, it is noted that during the period immediately after the war, major industrial powers such as Japan, Russia, Italy, France, Britain and Germany had been largely destroyed and their industrial capability had been devastated too. Consequently, US gained from this vacuum as the main supplier of commodities. As Japan and Europe finished rebuilding themselves, it meant that American manufacturers would lose their share of the market. These cut sharply profits of its major corporate and hence their stock- market values. Nevertheless, immediately after the war, many people especially, men had died and therefore immediate effect of people demanding employment could not be felt. However, in 1980s the new generation of baby boomers had entered the population en masse, obliging the government to create millions of jobs to accommodate them. This rise strained the market. Comparison on the Explanations According to Gandevani (1).the two major contrasting sides in this case are the two traditional camps of macroeconomics. The first case, which was majorly supported by Keynesian economists, holds that an increase in consumption will stimulate economic activities, when government puts proper intervention. Additionally, an increase in the velocity of money, which majorly happens with lower or middle class, will increase demand of commodities and therefore consumption (Suter, Keit, 4). The second and the third part expounds the supply side of economics which emphasizes that it is only production and aggregate supply which need to be increased so that an economy can be revived, and that free market will work better than the one in which the government involves. As noted immediately after the World War II, most powers had fought widely and therefore analysts note that government spending in military had helped to stabilize the world economy, which made the economies of even those of Third World countries such as Malaysia to prosper (Deardorff, 248). After the war too, the governments embarked on massive rebuilding of Infrastructure, which saw huge amount of money spent. The economic growth that was realized during this time supports the Keynesian economists’ belief that when governments properly plan fiscal and monitory policies they can strengthen and expand the demand of goods and services, which will in turn stimulate their economies. As they initiate publicly funded projects money will always be running in the hands of citizens, increasing demand for products of firms. This will in turn stimulate firms to increase production and therefore multiplying scenarios of economy will result. On the other hand, the supply side economics focuses on hurdles that hinder firms and individuals from producing goods and services. When the production is plenty, it will ultimately reduce prices. Lower prices will then stimulate consumptions. For instance when discussing the supply shock that ensued, although there was demand for products whose production depended on oil, lack of it hindered their production, leading to inflation that spiraled into the general increase in price level (Brin, David,2010) On the same note, baby boomer generation posed a greater challenge to the nation. There was abundant supply of labor that the nation could not address. However, it is important to note the supply side economists do not want government interference, which could not have provided the solution to the problem. On the point of agreement, the proponents of supply side economics concur with demand side economists that interest rates and taxes should be lowered to stimulate greater production and distribution of goods and services to consumers. Works Cited Brin, David. A Primer on Supply- Side Vs Demand- Side Economics. Open Salon. 2010 Boundless. How Supply Shocks Affect the Phillips Curve. 2013 Deardorff, Alan V. 1997 “International Conflict and Coordination in Environmental Policies,” in Jagdeep S. Bhandari and Alan O. Sykes, eds., Economic Dimensions in International Law: Comparative and Empirical Perspectives, New York: Cambridge University Press, pp. 248-274 Gandevani, Ned. Demand Vs. Supply Side. eHow Money.20013 Pettinger, Tejvan. Causes of Boom and Bust Cycles. Economic Help.2012 Online Revolutionary Socialist Party. End of the Long ‘Boom and Neo- Liberalism. 2013 Shmoop. com .The Reagan Era. 2013 Online Suter, Keith. The Long Boom. Global Directions. Keith Suter Pty Ltd, 2013.The Lawson Boom of the Late 1980s. Economic Help. 2008 http://econ.economicshelp.org/2008/01/lawson-boom-of-late-1980s.html Robert Skidelsky. Keynes: The return of the Master. Allen Lane. pp. 116, 126. ISBN 978- 1-84614-258-1. 2009. Read More