Many countries invested a lot of their resources in war, particularly the Second World War. Such an investment had negative impacts on most economies of the countries that participated in the war. The infrastructure of most countries was dilapidated, but the most worrying of all was the soaring number of unemployed people (Vonyó, 2013, p.232). Despite individuals possessing the requisite skills to work, they could not get opportunities where they could earn a living. Such a situation posed a danger to most political establishments who had to look for a solution before the conditions grew worse (Amin, 2014, p.26). Additionally, many governments ran deficits in an attempt to reconstruct housing and industries, making them face serious balance-of-payments complications in the process.
Nevertheless, from about 1950 to 1975, the economic growth in most countries especially those from Europe and East Asia experienced unprecedented growth. This period is commonly referred to as the golden age. During that period, international cooperation of impressive strength and scale was witnessed, a situation that had never been seen before (Black and Pemberton, 2017, p.2). The recovery after the Second World War was special because although some economies had recovered after the First World War, it had not been as fast as that experienced after the Second World War (Panitch and Gindin, 2013, p.33). The golden age was impressive because of the speed and spread of economic development. Some of the factors that contributed to the commencement of the golden age were better handling of the economic situation in countries affected by the Second World War, and the large aid flows from organizations and countries such as the United Nations Relief and Rehabilitation Administration, the US, and Canada.
Delegate your assignment to our experts and they will do the rest.
During the end of the Second World War, the colonial rule also came to an end in most countries. As a result, some of the developing countries grew at a faster pace than the industrialized ones. Demand in the developed countries spurred a boom of commodities which turned out to be of great benefit to countries that had natural resources such as the Middle East which produced a lot of oil. Other countries in Asia that became centers of industrialization include Singapore, South Korea, Malaysia, and Taiwan (Broadberry and Crafts, 2016, p.73). Perhaps the most important question that arises at this juncture is, what led to the rapid growth? It is essential to examine the evolution of the prominent institutions of modern capitalism; the big firms, labor unions, the state as well as the impact on these institutions of international forces, technological change, and social pressures.
The United States emerged as the country with the greatest production capacity and took the central role of designing and developing the postwar institutions that would shape international economic relations. The US and its European allies created a new international financial system as well as a framework to help the reconstruction of Europe at the Bretton Woods Conference in 1944 (Jahan, Mahmud and Papageorgiou, 2014, p.53). The conference was under the leadership of the British economist, John Maynard Keynes, who is accredited for the development of the Keynesian policies (Blinder, 2014, p.24). The conference culminated in the creation of three important financial institutions. The first institution was the International Monetary Fund (IMF) which was created to aid the struggling countries by loaning them hard currencies such as the dollar to use in buying the necessary commodities to build their economies (Eichengreen, 2015, p.7). The second institution was known as the International Bank for Reconstruction and Development, also referred to as the World Bank. The World Bank was established to provide finances for key investment projects such as bridges, roads, among others, particularly in Western Europe. The third institution is regarded as the most important institution, which is the set of rules for the international monetary system. Also, the Bretton Woods conference agreed that the value of the US dollar in terms of gold would be fixed at $35 for every ounce.
The narration above gives an overview of the effects of the war and the actions that the affected countries began to take. Perhaps the most important discussion that arises is whether the Keynesian economic policies are the best way of running a capitalist economy. It is essential that the meaning of a capitalist economy is understood first. Scott (2016, p.17) defines capitalism as an economic system whereby property including capital assets, is owned and controlled by private individuals. The description of capitalism implies that the system uses the price mechanism as its main coordinating tool as opposed to command and control (Amin, 2014, p.30). Under the capitalist system, institutions choose how to employ their labor and capital in markets based on market prices instead of tradition.
Keynesian policies constitute of total spending in the economy and the effects of the spending on output and inflation. The Keynesian theory comprises of six main propositions of which only three will be discussed and related to the golden age (Ostry and Berg, p.37). The first view is that aggregate demand is affected by numerous economic decisions, both public and private. The most prominent public decisions are monetary and fiscal policies. Secondly, Keynes suggested that changes in aggregate demand, whether expected or unexpected, have their highest short-run impact on real output as well as employment, and not on prices. Third, Keynes believed that prices, and particularly wages, respond insignificantly to changes in supply and demand causing shortages and surpluses, particularly of labor. Although many monetarists believe that the markets can respond favorably to changes in supply and demand, they accept the Keynesian position on this point. One such popular monetarist is Milton Friedman who states that under any conceivable institutional agreements, there is only an insignificant amount of flexibility in prices and wages.
John Maynard Keynes refers to his economic policies as the general theories of employment, interest, and money. Keynesian economists contend that free markets do not have self-balancing mechanisms that create employment opportunities. The Keynesian policies are thus used to justify government’s intervention in capitalist economies in an attempt to create employment opportunities and price stability. Keynes posited that insufficient overall demand could cause long periods of high unemployment (Blinder, 2014, p.1). Conventionally, the output of goods and services in an economy comprises of four components which include; consumption, investment, government purchases, and net exports. Any rise in demand has to be triggered by one of the four components.
When a country experiences recession, strong forces suppress demand, making spending to go down. Usually, consumer confidence goes down, making them reduce their spending (Wincott, 2013, p.819). The effects of the low demand results to some form of a cycle. For instance, the reduction in spending by consumers makes businesses to spend less on their investments. The government is thus tasked with increasing output. Looking at such a cycle, it is necessary that the government intervenes to moderate both the rise and fall of demand, commonly known as the business cycle. The most prominent method that most governments use is through taxation and regulation of the interest rates. If too much money flows into the economy, the central banks of most countries increase the interest rates of loans to discourage borrowing. If the economy has a low flow of money, the central bank lends money at low-interest rates to encourage borrowing. If the government does not regulate the economy, some people may lose their jobs while prolonging employment chances of the unemployment.
Although it is arguable, the economic recovery and growth of most countries that participated in the Second World War would not have developed as high a pace if the Bretton Woods Conference had not been held. It is likely that most of Keynes’s ideas had been embraced to solve most of the problems that the specific European and East Asian countries were facing (Webber, 2016, p.67). If the situation had been left to market forces, it is unlikely that the economy of the particular countries would have grown so steadily. In fact, many individuals credit Keynes for the development of world financial institutions mentioned before such as the World Bank and International Monetary Fund. Just the same way the central banks regulate the economies of their specific countries, the international financial institutions were established to boost as well as regulate the economies of particularly West European countries.
Critics of the Bretton Woods Conference allude that the conference was controversial. Since the US at the time was relatively stable, some scholars argue that the US found a loophole to make profits and establish itself as the new world superpower, a status that had been held by the UK for a long time (Blinder, 2014, p.7). The economy of the UK was also not stable at that time, which made the US have leeway in installing itself as the world monitor. Although the conference is said to have had some controversy, Keynes’ policies worked (Toniolo, 2017, p.260). European countries got an opportunity to receive funds, although on loan, to restructure their economy. Even though the US would benefit, the economic boost the countries received helped them solve many problems such as unemployment.
To conclude, it is accurate to reiterate that Keynesian policies are effective to regulate the economy of any capitalist state. Urgent needs such as employment should not be left to free markets to regulate. Often, governments that cannot offer employment opportunities to their citizens encounter political implications. Since Keynesian policies worked so well during the golden age and are accepted by a large majority of economists, any state can use them to regulate its economy.
Bibliography
Amin, S., 2014. Capitalism in the age of globalization: The management of contemporary society . Zed Books Ltd...
Black, L. and Pemberton, H., 2017. An affluent society? Britain's post-war'Golden Age'revisited . Routledge.
Blinder, A.S., 2014. Keynesian economics. The concise encyclopedia of economics , 2 (008).
Broadberry, S.N. and Crafts, N.F., 2016. British economic policy and industrial performance in the early post-war period. Business History , 38 (4), pp.65-91.
Eichengreen, B., 2015. Mainsprings of economic recovery in post-war Europe (pp. 3-38). Cambridge: Cambridge University Press.
Jahan, S., Mahmud, A.S. and Papageorgiou, C., 2014. What is Keynesian economics? Finance & Development , 51 (3), pp.53-54.
Marglin, S.A. and Schor, J.B. eds., 2012. The golden age of capitalism: reinterpreting the postwar experience . Oxford University Press.
Ostry, J.D. and Berg, A., 2014. Measure for measure. Finance & Development , 51 (3), pp.35-38.
Panitch, L. and Gindin, S., 2013. Finance and American empire. In American empire and the political economy of global finance (pp. 17-47). Palgrave Macmillan, London.
Scott, B.R., 2016. The political economy of capitalism . Division of Research, Harvard Business School.
Toniolo, G., 2017. Europe’s Golden Age, 1950‐1973: Speculations from a Long‐run Perspective. The Economic History Review , 51 (2), pp.252-267.
Vonyó, T., 2013. Post-war reconstruction and the Golden Age of economic growth. European Review of Economic History , 12 (2), pp.221-241.
Webber, M.J., 2016. The golden age illusion: Rethinking postwar capitalism . Guilford Press.
Wincott, D., 2013. The (golden) age of the welfare state: Interrogating a conventional wisdom. Public Administration , 91 (4), pp.806-822.
