Ha-Joon Chang - Economics - The User's Guide

The period between 1945, the end of the Second World War, and 1973, the first Oil Shock, is often called the ‘Golden Age of capitalism’. The period really deserves the name, as it achieved the highest growth rate ever. Between 1950 and 1973, per capita income in Western Europe grew at an astonishing rate of 4.1 per cent per year. The US grew more slowly, but at an unprecedented rate of 2.5 per cent. West Germany grew at 5.0 per cent, earning the title of the ‘Miracle on the Rhine’, while Japan grew even faster at 8.1 per cent, starting off the chain of ‘economic miracles’ in East Asia in the next half a century.

High growth was not the only economic achievement of the Golden Age. Unemployment, the bane of the working class, was virtually eliminated in the advanced capitalist countries (henceforth ACCs) of Western Europe, Japan and the US (see Chapter 10). These economies were also remarkably stable on a number of accounts – output (and thus employment), prices and finance. Outputs fluctuated much less than in the previous periods, not least thanks to Keynesian fiscal policy, which increased government spending during downturns and reduced it during booms. [47] A. Glyn, A. Hughes, A. Lipietz and A. Singh, ‘The rise and fall of the Golden Age’, in S. Marglin and J. Schor (eds.), The Golden Age of Capitalism (Oxford: Oxford University Press, 1990), p. 45, table 2.4. The rate of inflation , that is, the rate at which the general price level rises, was relatively low. [48] The average inflation for the ACCs during this period was around 4 per cent. Ibid., p. 45, table 2.4. And there was a very high degree of financial stability. During the Golden Age, virtually no country was in banking crisis. In contrast, since 1975, anything between 5 and 35 per cent of countries in any given year have been in banking crisis, except for a few years in the mid-2000s. [49] C. Reinhart and K. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009), p. 252,figure 16. 1.

So in every measure the Golden Age was a remarkable period. When Harold Macmillan, the British prime minister, said, ‘You’ve never had it so good,’ he wasn’t exaggerating. Exactly what lay behind this sterling economic performance, which was unprecedented and has since been unparalleled, is a matter of an ongoing dispute.

Some point out that, after the Second World War, there was an unusually large pool of new technologies that were waiting to be exploited, which gave an impetus to growth in the Golden Age. Many new technologies that had been developed during the war for military purposes had civilian uses – computers, electronics, radar, jet engines, synthetic rubber, microwave (applied from radar technology) and much more. With the end of the war, a lot of new investments that use these technologies were made, first for post-war reconstruction and then for the meeting of consumer demands pent up during wartime austerity.

There were also some important changes in the international economic system that facilitated economic development during the Golden Age.

The 1944 meeting of the Allies in the Second World War in the New Hampshire resort of Bretton Woods established two key institutions of the post-war international financial system, which are thus dubbed the Bretton Woods Institutions (BWIs) – the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), more commonly known as the World Bank. [50] Today, people think of the World Bank as the bank for poor countries, but its first clients were the war-torn economies of Europe. This is reflected in its official name, which is the International Bank for Reconstruction and Development (IBRD). (Emphasis added.)

The IMF was established to provide short-term funding to countries in balance of paymentscrises (balance of payments is the statement of a country’s position in economic transactions with the rest of the world – see Chapter 12 for full details). A balance of payments crisis happens when a country is paying other countries (e.g., when it imports goods or services) so much more than it gets from them that no one is willing to lend money to it any more. The typical result is a financial panic, followed by a deep recession. By providing emergency loans to countries in such a situation, the IMF allowed them to tide over such crises with fewer negative consequences.

The World Bank was established to provide loans for ‘project lending’ (that is, money that is given to particular investment projects, such as building a dam). By providing loans of longer maturities and/or lower interest rates than are offered by the private-sector banks, the World Bank enabled its client countries to invest more aggressively than otherwise possible.

Making up the third leg of the post-war world economic system was the GATT (General Agreement on Trade and Tariffs), which was signed in 1947. Between 1947 and 1967, the GATT organized six series of negotiations (called ‘rounds’) that resulted in cuts in tariffs (mostly) among the rich countries. Being between countries at similar levels of development, these cuts brought about positive outcomes by expanding markets and stimulating productivity growth through greater competition.

In Europe, a new experiment in international integration with far-reaching consequences was conducted. It started with the creation of the European Coal and Steel Community (ECSC) in 1951 by six countries (West Germany, France, Italy, the Netherlands, Belgium and Luxembourg) and culminated in the creation of the European Economic Community (EEC) – a free-trade agreement – through the Treaty of Rome (1957). [51] The ECSC coordinated efforts to upgrade the production facilities in the coal and steel industries. The 1957 Treaty of Rome created the European Atomic Energy Community (Euroatom) as well as the EEC. In 1967, these three communities were integrated to form the European Communities (EC). In 1973, the UK, Ireland and Denmark joined the group, which was by then called the EC (European Communities). By bringing peace to a region riven with wars and rivalries and by integrating markets, the EEC contributed to the economic development in the member countries.

The most influential explanation of the Golden Age is, however, that it was mainly the result of reforms in economic policies and institutions that gave birth to the mixed economy– mixing positive features of capitalism and socialism.

Following the Great Depression, the limits of laissez-faire capitalism came to be widely accepted. It was agreed that the government should take an active role to deal with the failings of unregulated markets. At the same time, the success in wartime planning during the Second World War diminished scepticism about the feasibility of government intervention. Electoral successes by parties of the left in many European countries, thanks to their key roles in fighting fascism, led to the expansion of the welfare state and greater labour rights.

These changes in policies and institutions are seen to have contributed to the making of the Golden Age in a number of ways – creating social peace, encouraging investment, increasing social mobility and promoting technological innovations. Let me elaborate a little, as this is an important point.