Golden years of the Mixed Economy

1. The Golden years of the Mixed
Economy
Recap.

2. The Golden Years, 1948 to 1971
New realties created by WW2, and lessons learnt from GD:
From a Political Economy perspective, three overarching developments
shaped this period:
• Politically, multi – power world ends, dual
Superpower(US/USSR)rivalry (the Cold War) creates spheres of
influence, supported by economic and military aid from the
Superpowers; US leads “Free World”. Colonial empires end.
• Financially, “Multilateralism’ – the development of BWIs to support
BOP stabilisation (IMF); Infrastructure and major projects (IBRD,
IFC); Trade liberalisation (GATT/WTO); and specific US assistance to
Western Europe (Marshall Aid).
• Economic Management wise, the shift from “Free market/Gold
Standard” Capitalism, to greater Monetary and Fiscal intervention
by Governments, to encourage growth, employment and welfare,
with tolerance for moderate inflation (Keynesianism).

3. Cont’d
• Between ‘48-’71, US and European GDP growth was higher than
ever before, or since, that period.
• Political economy emphasised “Full employment”. Starting late
‘60s, monetary expansion and rising demand, particularly in US/UK
led to rising inflation;
• Extraneous ‘shocks’: oil prices; floating currencies; commodity
shortage (Russian wheat; animal feed)…
1. Oil price hikes furthered inflation, worsened by wage increases
to preempt even higher inflation, and by easy money policies to
help demand, for preventing recession..
2. Prices and Income policies failed. US $ broke link with Gold;
Currencies floated, initially destabilising.
3. Phillips curve broke down: unemployment rose, while inflations
rose as well, producing Stagflation.

4. The rise of Supply- side/Monetarist
theories aka Washington Consensus.
• Milton Friedman/others had argued against central tenet of
Keynesianism i.e. that aggregate Demand management
policies would tend to generate equilibrium.
• He argued that real outcomes could not be dictated by
money supply, but by real supply-side advances: growth in
productivity; lower wages or lower taxes; new or cheaper
raw material, etc.
• Capital creation should spur investment, not Government.
• Therefore, “inflation in long-run always a monetary
phenomena”; i.e. to deal with this, check demand-side ,
encourage supply side.
• Inflation targeting, as chief mission of Central Banks, now
began.