3. GDP per person (2005$) 1950-2009
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
AUS
DNK
GBR
USA
FRA
Source: Penn World
Tables, 2011
Week 2:1
4. Labour productivity growth
(%pa Growth) GVA per hour worked
Week 1:2
Source: OECD Stats extract 2013
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Australia France Germany Greece Ireland Spain United
Kingdom
United
States
OECD
GDP per hour worked 2001-07
GDP per hour worked 2007-09
GDP per hour worked 2009-11
5. GDP per hour worked Growth %pa
(PPP converted $, 2005 prices)
Source: Penn World
Tables, 2011
-6
-4
-2
0
2
4
6
8
10
12
14
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
GDP growth
Week 2:1
6. Labour productivity
GVA per hour worked
Week 1:2
0
10
20
30
40
50
60
70
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
France
Ireland
Italy
United Kingdom
United States
Source: OECD Stats extract 2011
7. So what can be said about UK
performance?
Labour productivity has traditionally lagged behind
Is it a measurement thing?
‘Bacon and Eltis’ theory – too few producers?
Are Britons less skilled than other nations?
Do they invest less in capital, or the wrong sort of capital?
Sources of Growth literature also focuses on
disaggregated national performance
Is it down to the manufacturing/service balance in the
economy?
The public/private sector balance?
Week 2:1
9. The post-war landscape
Summarise the basic macro economic schools of thought
Neoclassical
Keynesian
Monetarist
Post war Britain (1945-1973)
What did it look like as it emerged from the 1930s and the
devastating impact of WWII?
What were the main economic objectives?
What policies were implemented to achieve these?
Dominated by Keynesian approach to the macro economy
Did they work?
The breakdown…(1974-1979)
Week 2:1
10. The neoclassical approach
The market is stable, if left to itself
Shocks will occur but prices will adjust and the market
will return to equilibrium in the long run
Government interference runs the risk of making things
worse
The role of Government is to set rules that create a
stable environment with conducive infrastructure to
allow firms to operate unhindered
Week 2:1
11. Keynesianism in a nutshell
There is no automatic tendency towards full
employment
Markets cannot be left to the own devices
The market is inherently unstable
Demand needs to be stimulated
DEMAND MANAGEMENT POLICIES
To control flows of expenditure to stimulate output and
employment
Fiscal policies dominated and a constant ‘tinkering’
Week 2:1
13. 1945:
Keynesianism dominated following the 1930s
Aggregate demand needed stimulating
Full employment was THE policy objective
Achieved by resorting to incomes policies to control inflation
US Position
The war had in effect stimulated its economy out of the 1930’s
collapse
Western Europe faced the negative consequences of war
Resource consequences
Manpower
losses (obviously)
Also distribution issues – heavy industry and the public sector was
growing, but other parts of the economy were suffering
Shortage of miners and an ageing population
Week 2:1
15. Resource consequences
Capital
War losses
Natural physical depreciation
Affected by the reduced capacity for savings and investment
Britain had lost 1/3rd of its shipping tonnage
Overseas assets had suffered during the war, either as a result
of being put out of commission or simply being disposed of
WAR DEBTS were massive - £3.5bn which was 45% of GNP in
1945
Removal of the Lend-Lease arrangement Britain had with the
US
Productive capacity damaged and distorted
Week 2:1
16. Post-War Economic Policy
Because of the dire situation regarding capital and
labour there was a fear of inflation
The 1930s was still in people’s memories
Price and incomes policies continued into the 1970s
A desire to recover economically but also to restore its
international reputation and position
Earlier studies (Feinstein, 1972) suggest that the post
war recovery was pretty good, but
No net increase in total real wealth 1913-1951
(Alford, 1988)
Week 2:1
17. Impact of WWII
Overall the impact of WWII was relatively positive
But was it an opportunity wasted?
In 1948 the UK accounted for 42% of exports in Western
Europe – 9.5 times larger than W. Germany – only 2 times
larger by 1951
Widespread change in ideas between 1939-45 (Addison, 1977)
People were fighting for something they believed in
They were determined to make things different afterwards
BEVERIDGE REPORT 1942
Increased commitment to social welfare; employment;
distribution of wealth
WHITE PAPER ON EMPLOYMENT 1944
Week 2:1
18. Political landscape
Targets were ideological, but vague objectives
Peacetime economies are more complicated than
wartime ones
Economists probably not as influential as they thought
they were
What was the basic role of Government?
Week 2:1
19. Key policies – PLANNING!
Largely driven by the fear of inflation leading to deflation, as observed
in the 1930s
Nationalisation
Coal; rail; transport; electricity and gas; civil aviation; the bank of England
Aim to establish workable administrative structures (not economic
requirements)
Controls or production and consumption
Cheap money
Rationing was no longer desirable
The introduction of national income accounting; of regional policy too
External pressures
On exchange rates through international currency arrangements
Marshall Aid
The Export Drive to improve Balance of Payments position
Shift in focus for the Treasury
No longer resource but financial planningWeek 2:1
20. Incomes policies…
To replace the market for wage determination with
administrative targets
Policy on and policy-off periods which were relatively
short ~6months or so...
Culminating in the Social Contract of 1974-1978
Which ultimately led to the Winter of Discontent and the
collapse of the labour government
Week 2:1
21. Balance of Payments
During the 1950s and 1960s there were continual
problems with BofP deficits...
Governments therefore
Manipulated aggregate demand (stop-go policies)
Adopted exchange control measures to keep the external
account in balance (devaluation a last resort in 1967 -14%)
Other policies such as investment incentives to promote
capital formation and long run economic growth
REPRESENTS A NARROW INTERPRETATION OF
KEYNESIAN THINKING (MAYNARD, 1989)
Week 2:1
22. Tomorrow…
Where did it all go wrong?
No supply side thinking at all
The 1970s onwards...
Week 2:1
23. References
For last week:
Griffiths and Wall (2011) 12th Edition – handy for the Tinbergen theory
Mosley (1976) Towards a Satisficing theory of Economic Policy’, The
Economic Journal, 86(341), 59-72 (available on JSTOR)
O’Mahony, M. and C. Robinson (2007) UK Growth and Productivity in an
International Perspective: Evidence from EUKLEMS, National Institute
Economic Review, 200, April, 2007, 79-86
For this week:
Alford, BWE (1988) ‘British Economic Performance 1945-1975’, Chapters1
and 2
Maynard, G. (1989) The Economy Under Thatcher, chapter
1, Blackwell, London
Week 2:1
Editor's Notes
So last week, we discussed the policy objectives and indsutrments. WE looked at the theories of economic policy and then we went on to discuss trends in the UK performance relative it interesting comparison countries – France, Germany, Italy, US, Australia Ireland To pick a few..
Today I want to begin to look at the overall objective of macro policy and the main measure of how successful an economy is. We have looked at individual policy target variables such as unemployment, debt, inflation etc. but ultimately, the driver of policy as we are currently seeing is economic growth – defined in terms of national income per head.
So here we have a more up to date picture than what we had in the blackboard slides. This gives you an idea of what has been happening in the recent period – we see that since the beginning of the millennium we have experienced moderate growth per hour – around 2%. In the period 1007-2009 we saw a distinct decline in earnings per hour and then again some sign of recovery. Ireland and Spain have unemployment problems (remember last week)14 and 20%, respectively in 2010
Constant growth of around 5% per annum until 2008, when it all went a bit crazy.
If we look from the 1970s, we see that the UK trajectory of productivity has been somewhat flatter than say, the US and there has been a widening of the productivity gap, despite some signs of this gap closing until the 1990s
These are the sorts of arguments that will crop up over the next few weeks at different points in time.
What I want to do now is go back in time to the end of the war..
We see the transitions from a belief in the Hayekian world of the neoclassical approach which appeared to fail us in the 1930s, a move into Keynesian economic thought in the 19302-1960’s before the landscape changed again and a move to a more monetarist view of the macro economy was influential. Today we will look at Post War Britain…. And we will hopefully get as far as the mid 1970s when keynesianism appeared to breakdown.
Firstly, what were we leaving behind. The fundamentals from your Principals course – a neoclassical belief that if left to its own devices, the market would be inherently stable and would tend towards equilibrium. There would of course be shocks to the system, but these would be short term impacts and the market would adjust via the pricing mechanism and restore the long run equilibrium. Government intervention was most likely to make matters worse. The role of government was minimal; to keep institutions stable and predictable so that the market could operate within the existing infrastructure with as little interference as possible and firms could operate unhindered.
BUT, after what happened in the 1930s - stock market crash, bank collapse, retrenchment of lending, higher unemployment, tariffs, crop failure in the US etc…all had a contractionary effect on global economy. Keynesianism arrived on the scene as a potential answer. Markets had no automatic tendency towards full employment. Keynes argued that markets cannot be left unregulated – to their own devices; markets are unstable – subject to shocks and very rarely in a state of equilibrium. What we need to do therefore is to actively stimulate demand in the economy when its on a downturn particularly. Thus we entered a period of demand management policies, whereby governments actively tried to control the flow of expenditure to stimulate output and thus generate employment. FULL EMPLOYMENT WAS THE OVERRIDING OBJECTIVE. Demand management was largely orchestrated using fiscal policies, that is, policies of taxation and government spending…and generally constant tinkering with the system through incomes and pricing policies also.
So we can have a look at the industrial structure. You may have looked at more up to date pictures of this before -
Areas like coventry,swansea and portsmouth particularly as well as londonThere was a general consequence of underinvestment
