CHAPTER 6 LIBERALISM SINCE WORLD WAR II

Keynesian economics is an economic theory named after John Maynard Keynes, a British economist who lived from 1883 to He is most well-known for his simple explanation for the cause of the Great Depression. His economic theory was based on a circular flow of money, which refers to the idea that when spending increases in an economy, earnings also increase, which can lead to even more spending and earnings. Keynes' ideas spawned numerous interventionist economic policies during the Great Depression. In Keynes' theory, one person's spending goes towards another person's earnings, and when that person spends his or her earnings, he or she is, in effect, supporting another person's earnings. This cycle continues on and helps support a normal, functioning economy. When the Great Depression hit, people's natural reaction was to hoard their money. Under Keynes' theory, this stopped the circular flow of money, keeping the economy at a standstill.

Keynes' solution to this poor economic state was to "prime the pump." He argued that the government should step in to increase spending, either by increasing the money supply or by actually buying things itself. During the Great Depression, however, this was not a popular solution. It is said, however, that the massive defense spending that United States president Franklin Delano Roosevelt initiated helped revive the U.S. economy. Keynesian economics advocates for the public sector to step in to assist the economy generally, which is a significant departure from popular economic thought that preceded it — laissez-faire capitalism. Laissez-faire capitalism supported the exclusion of the public sector in the market. The belief was that an unfettered market would achieve balance on its own.

A.British Welfare State  Sir William Beveridge: social security is necessary but should not stifle incentive, opportunity or responsibility o Provide a minimum to live but leave room for people to strive to obtain more than the minimum  Britain established several acts to provide some social security (social safety nets, social programs)  “post war consensus”: when both the collectivist Labour Party and the Individualist conservative Party agreed help was needed  Start of the growth of modern liberalism internationally – some social programs, to assist people – employment insurance, assistance to elderly, child care and health care

B. Post War Economy – Canada  Page 215  Strengthened social programs  Create of welfare state ideas: o Universal health care o Old age security o Foreign investment review agency o CRTC  Moved towards Modern (contemporary) liberalism – abandoning the more ‘free market’ ideas for some government intervention

C. Economic Crisis: 1970s  Causes: o Withdrawal from Bretton Woods agreement  These countries no longer had to use price of gold to determine worth of currency  World currencies freely floated on markets – led to inflation and slowing of economic activities o Arab-Israeli War (4 th )  OPEC – 5 month embargo on oil to US and Netherlands (supporting Israel)  reduced production – prices skyrocketed – gas shortages in US – consumer goods rose – prices rose – economic slowdown and inflation  led to the need to change economic strategy  liberal democracies faced a slowdown in the economy (recession) and inflation - Stagflation  British PM Callaghan realized that they could no longer spend their way out of recession (Keynesian economics wasn’t working)

D. A New Way of thinking: Monetarism  Recession of 1970s led to a pendulum swing back to favouring the more classical liberal notion of laissez faire or free market (in some countries)  Monetarism: o Control of countries money supply is the best way to encourage economic growth and limit unemployment and inflation o Money supply is controlled through the regulation of interest rates  Milton Friedman o Inflation was caused by too much money supply (fault of the Central Banks over production) o Argued that as money rises – consumer spending rises – demand rises – inflation rises....which leads to a recession o Wanted money supply to be linked to the rate of inflation (an economic indicator)

 Friedrich Hayek o Critic of collectivism (and Keynes) o Believed for collectivism to work the government needed to control the economy which would eventually lead to the government controlling social aspects of people’s lives o Believed it was impossible for government to have the knowledge and ability to make all economic decisions  Government controlled supply but would never have enough knowledge of demand  Both Friedman and Hayek promoted Price System, Free market o Only way to balance supply and demand and maintain individual liberty

E. Price System/Free Market : There are 5 key characteristics in a market economy 1. Private ownership/freedom to buy and sell  Goods and services must belong to the individual who is free to sell them for whatever price they can convince a buyer to pay  The buyer is free to seek out the best deal possible 2. Free competition  Businesses are free to produce whatever they want, however, many businesses can produce the same goods  Competition helps keep prices low for consumers 3. Prices are set by forces of supply and demand  Price is determined by how much is available compared to how much the consumer wants it. 4. Profit motive  To make as much money (profit) as possible – ultimate goal 5. Consumer Sovereignty  The consumer decides what will be produced with the resources available as they will only buy what they want

F. Monetarism vs. Keynes  Keynes – interventionalist  Monetarist – more classical liberalist o Margaret Thatcher – Great Britain o Ronald Reagan – USA Margaret Thatcher: Conservative Prime Minister Ronald Reagan: Republican President

ECONOMIC PRINCIPLES AND THE PRACTISE OF LIBERALISM  USA argued that liberal goals are achieved by limiting government intervention and only providing the most basic social programs o Drive for wealth arises from self interest and need to complete (individualism, classical liberalism notions)  Canada, Sweden favour more government intervention o Argue that inequality undermines liberalism as citizens fall victim to business cycle and struggle (modern liberalism – social safety nets) o Still encourage private property and initiative but also believe in government intervention and taxation as essential elements of society o The level of involvement depends on the status of the economy

A.Sweden:  **Social Safety Nets: generous welfare system, unemployment, maternity etc payments are extremely high in order to maintain standard of living of people o Cradle to Grave (or “womb to tomb”)  Caused extremely high taxes to the people. Estimated that in the 1960s, 70% of the population depended on the government for its livelihood  Reform was needed o 1992 – Tax rates: 50% of income, Canada: 36.5%, USA: 29.4% o 1993 commission made necessary changes - examples: unemployment insurance in the former system provided 90% of person’s previous income, after reforms only 80% of income - Example: sick or injuring – received % of salary. After the reforms worker had to wait 2 weeks and receive only 80% of salary

B. Canada  Individualism (can have private ownership, individual rights) and collectivism (still look out for needs of society - social assistance programs, gov’t ownership  Federal Level – (1990s)Canada has implemented some Keynesian Economics - put billions into building and repairing infrastructure o Today: Harper – stimulus package to help failing economy  Provincially (Alberta)– gone more towards supply side - Ralph Klein  cut spending to reduce the deficit (education, health care)  de-regulated to help improve business (less rules)  privatization (AGT)