The Return to the Market

The global economy on the eve of World War I

The catastrophe of World War I for Europe The Great Depression

The subsequent turn from the market The return to the market after economic

stagnation in the 1970s

The power of ideas

The value of studying economic history:

We cannot understand the present, nor plan for the future, without

understanding the past; and history is often driven by ideas and underlying

social forces, not just by events.

Economies throughout the world have been moving from a model in which there was extensive state intervention to a model of free markets: “In its entirety, the struggle

constitutes one of the great defining dramas of the 20th century.”

Yergin, D. & Stanislaw, J. (2002). The Commanding Heights. New York:

Touchstone. (p. xi)

Some questions about the turn to the market

1. Is it irreversible?2. A natural path of development?3. What will the consequences be?

4. What is the role of the state in a market economy?

The global economy on the eve of world war i

The causes of world war i

The consequences of world war i

Destabilization of the global economic & financial system:

The great depression and failure of government economic policy

Extent of the Depression

The great depression and failure of government economic policy

Causes of the Depression

The great depression and failure of government economic policy

Government responses to the Depression: The Wrong Medicine

The turn from the market and the new economic models

The problem with the market: It wasn’t delivering the goods

The turn from the market and the new economic models

The command economies: Communism and Fascism

The theoretical foundation for the retreat from reliance on market forces in the west

John Maynard KeynesThe General Theory of Employment, Interest, and Money

(1936)

Fiscal policy would enable wise managers to

stabilize the economy without resorting to actual controls.

Economic growth & prosperity resulting from government macroeconomic policy

The end of a very good idea

What Britain’s economy looked like in the 1970s

- high inflation, and . . .- high unemployment- nationalized industries losing money- high taxes to fund welfare state- labor strife- negative balance of payments and

declining value of the pound

And in the U.S. . . .

The grim realities of stagflation in the 1970s

The return to the market

The economic policies of Ronald Reagan and Margaret Thatcher:

Another very good idea: The theoretical foundation for the return to the Market

Friedrich van Hayek and the issue of economic

information

Milton Friedman, the Chicago School, and monetary policy

Implications for government’s role in the economy

The issue of economic information

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, and if we can start out from a given system of preferences and if we command complete knowledge of the available means, the problem which remains purely one of logic . . . This, however, is emphatically not the economic problem which society faces.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

The economic problem of society is thus . . . How to secure the best use of resources known to any of the members of society for ends whose relative importance only these individuals know. Or, to put it briefly, it is the problem of utilization of knowledge not given to anyone in its totality.

Friedrich von Hayek (1945), The Use of Knowledge in Society. American Economic Review 35(4): 519-530 cited in H.E. Daly & J.B. Cobb, 1994, For the Common Good. Boston: Beacon Press

Milton Friedman, the Chicago School, and monetary policy

Monetarism and the role of government in macroeconomic policy

Milton Friedman, the Chicago School, and monetary policy

Monetarism and the role of government in macroeconomic policy

The Chicago economists believed, in practice, in a very small number of theorems about the way decision makers allocated resources and the ways

these allocations led to prices. They trusted in markets and the effectiveness of competition. Left to their own devices, markets produced the best outcomes. Prices were the best allocators of resources. Any intervention to change what

markets, left alone, would achieve was likely to be counterproductive.

At the same time, the government also got busy trying to displace Keynesianism with monetarism. Instead of intervening with fiscal policy, the Tory government believed that its main economic job was to ensure a steady growth in the money

supply that would be commensurate with economic growth.

(The Commanding Heights, p.128)

Some Critical tests of the free market

Will the market deliver the goods? Will the results be seen as fair and

equitable? What will happen to national identity in an

international economy? Can the environment sustain it?