2023 FUTURE OBSERVATORY
2023 FUTURE OBSERVATORY
Keynesianism worked remarkably well in its time; and the deployment of the theories of demand management may well have led, in part at least, to the long-lived post-war boom. It is popularly believed that it was undermined by the advent of Monetarism. This probably was a major factor, not least when the Phillips' Curve - then espoused by Keynesianists - was proved false. On the other hand, an equally important - but less reported - factor was the breakdown, slightly earlier - in 1970, of the 1944 Bretton Woods agreement; which may have led to the developments which destroyed the Keynesian consensus.
The original agreement had been one of the great economic landmarks. It created the World Bank and the IMF - both of whose roles changed significantly, however, after the debacle in the 1970s; indeed, both have recently functioned as though unrelated to the UN (whose Secretary General is no longer invited to their annual meetings!). Above all, it created a stable system of fixed exchange rates; which worked well for more than two decades. The destruction of these was probably Richard Nixon's most deplorable, if also least known, legacy! Once the global financial markets had emerged, Keynesianism on the national scale became impossible. In general, it could now only be successfully implemented on the same global scale as that on which the financial markets operate. Anything less will be rapidly undermined by movements in hot money.
At this point it should be noted that something really did happen in the early 1970s. There occurred some form of watershed which separated the optimistic post-war boom years from the pessimistic end of century uncertainties. In addition to the breakdown of the Bretton Woods agreements there was, of course, the oil-price shock of 1973. The massive redistribution of currency flows associated with this, associated with the effective deregulation of the global financial markets, certainly destabilized governments' economic policies around the world. The actual impact of the higher oil prices was, in the longer-term at least, more or less minimized. Energy conservation became the byword and demand fell - so that prices returned to reasonable levels.The psychological impact, however, was much greater - and this still remains with us. The doom and gloom surrounding the Millennium is a pale imitation of that which followed that oil-price shock. For many, especially government economists, it was the end of the world as they knew it. It is easy, now, to laugh off the views of these alarmists. Yet it was the end of the world as we then knew it. All in all, the 1970s was a watershed in advance of the revolutions themselves. It is arguable that it was artificially induced, at least it was self-induced, but it was a watershed none the less; and in some respects it has actually paved the way for the real revolutions - so that, in some perverse way, we are prepared for the pain to come from them!
The death knell for Keynesianism probably came with the demise of the Bretton Wood agreements; which led to the financial markets' destabilization of any such national planning. It may return, as a viable alternative, when it can be implemented on a global scale.
As was reflected by the research groups - and by the other futurologists who addressed the subject - there is a great deal of confusion as to the events surrounding the demise of Keynesianism. It is important, therefore that the real - albeit complex - reasons are understood; for these allow for some form of reincarnation of Keynesian principles (though probably only on a global scale), where the more commonly accepted explanations would kill Keynesianism off for all time. It is reassuring to note, however, that - despite the economic theories in vogue - a significant number of respondents to the research (and of other futurologists) could still be counted as closet Keynesians; or should it now be post-Keynesians (as this new philosophy is now, in turn, becoming fashionable!).
A Harris Poll in Business Week reported that only 5% of Americans though that "...its corporations should have only one purpose...to make the most profit for their shareholders..." Profit maximisation is one of the basic assumptions of most micro-economic theory.
Morris Miller - previously an executive director of the World Bank - states, albeit rather unfashionably, that "...the circumstances of the periods when the correlation of trade and growth has been universally positive include such factors as steady-hand statesman-like leadership that has underpinned the stability of key currencies, kept real interest rates low, induced a fairer sharing of rising incomes." Incidentally, he shows his hand in the subtitle - 'Why We Need a New Bretton Woods'!
Michael Mander reports that the Boskin Commission decided that "The official [US} consumer price index overestimates inflation by a bit more than a percentage point and Frank Hahn, president of the Royal Economic Society, was quoted (by Karen Gold) even earlier, at the end of the 1980s, as saying dismissively "Monetarism is now dead. It was not very alive among economists even when it was alive...". The Economist[t], supports this view; "Official figures in most countries almost certainly underestimate growth and inflation, and by an increasing margin." In an earlier edition[s] , it even stated that "The true rate of inflation in many countries may now be close to zero."
The IMF and OECD still adhere to the by now orthodox view that the best way to cut unemployment in the industrial world is to free job markets, and nearly three quarters of our individuals predict a global labour market within three decades, the ILO (International Labour Organisation), in its report 'World Employment in 1995' - as reported by Hamish McRae[a] - argues that "...there has been inadequate demand, particularly in the European economy, for the last 20 years. Policy has been biased against growth...it calls for coordinated expansionary policies by the main developed countries..." Perhaps Keynes was right after all! Certainly, the actual programmes of most western governments - most recently overtly obsessed with inflation and convinced of any government's inability to solve the problem of unemployment - were highly deflationary. It is no accident that there has been a major recession, of one form or another, in each of the past three decades.
One caveat is that - in the words of Clive Crook - "Expectations of continually rising living standards are now so deeply rooted that growth rates as low as 2% a year are regarded as deplorable, or even a crisis of capitalism", and notes in comparison, "For almost all of the period that human beings have lived, the average rate of economic growth each year has been...zero"!
Lester Thurrow offers a fundamental explanation "The rules for the world’s trading system have always been written and enforced by its dominant economies - Great Britain in the nineteenth century and the United States in the twentieth century. But the twenty-first century will have no dominant power able to design, organize, and enforce the rules of the economic game." He does though, later, add "The [European] Common Market is now the world’s largest market..." and suggests that, by default, it may take over the role. He gives the example of its ‘ISO 9000’ standard, on quality, which has now been accepted world-wide. He adds an excuse for those who visited the breakdown of the Bretton Woods system on us "In 1971 it was possible to believe, and almost all economists so believed, that a movement to flexible exchange rates would lead to great financial and economic stability." How wrong can you be? But perhaps it was, as he also suggests, the unexpectedly bad behaviour of the financial markets which undermined their good intentions. Thus he finally adds "When the rush to the door started, everyone jumped on the trends regardless of fundamentals." And, of course, they are still on the roller-coaster; if that isn’t mixing too many metaphors!
Lawrence et al, whilst admitting that "Historians still debate why the Bretton Woods monetary system broke down...", suggest that "According to a commonly held view, the growing mobility of international capital undermined the system’s sustainability."
Paul Krugman records that "For a generation after World War II, America had a 'magic economy'...in less than thirty years everything doubled...[people] took it for granted that the economy would continue to deliver an ever higher material standard of living." He continues quite simply "In 1973 the magic went away"! Paul Krugman also says "It wasn't until 1978 or 1979 that the public began to develop a really deep sense of unease about the economic future...and the psychological change in the end reached deeper than the numbers themselves can convey." The beginning of the age of psychological doom and gloom was bad enough, but, as Krugman adds, "...the 1970s saw an astonishing rise in the influence of strongly conservative ideas in economics (as well as in other areas) a rise that was only certified by the 1980 victory of Ronald Reagan." To add further to the confusion, as Paul Krugman also points out "...the early 1970s saw the large-scale entry of the baby boomers into the labor market...Anyone who was touched, one way or another, by the cultural winds of the 1960s finds it plausible that social factors played a significant role in the 1970s slowdown." He also offers a technological explanation (paralleling that of Kondratieff Cycles) "...the set of technologies that had driven the postwar boom had been pretty much fully exploited, while the technologies which would eventually power another boom were not yet ready for prime time."
Lawrence et al describe the current situation as resulting from "...tension between the two fundamental features of the world at the end of the twentieth century. First, the world is organized politically into nation-states with sovereign governments. Second, growing economic integration among nations is eroding differences among national economies and undermining their autonomy."
As reported by Michalski et al on behalf of the OECD, despite the dramatic surge in the levels of financial trading, "There has been a significant decline in total saving in the OECD areas as a whole over the last 30 years or so. The average gross national savings rate has fallen about 4 percentage points of GDP." Though, they go on to predict that "...between 1990 and 2010 the OECD-wide private saving rate would remain virtually unchanged or increase slightly." Even then, as a result of ageing populations, public debt levels could climb (by 2030) "...to 100 percent of the GDP in the US, 150 percent in France, 170 percent in Japan and 200 percent in Italy."
7 May 2003
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