British Economic Issues in the 1970s PDF

Theme 3: Politics, Economics, and Ideology from the 1970s to the end of the Cold War 1. The Decline of Keynesianism and the Birth of Neo-Liberalism (Britain) Vanessa Lincoln Terminale History Key Issues How far do you agree that inflation was the ke...

Theme 3: Politics, Economics, and Ideology from the 1970s to the end of the Cold War 1. The Decline of Keynesianism and the Birth of Neo-Liberalism (Britain) Vanessa Lincoln Terminale History Key Issues How far do you agree that inflation was the key factor in Britain’s economic problems in the 1970s? How justified were right wing criticisms of Social Democracy in Britain in the 1970s? Britain’s economic problems were largely brought about by factors beyond their control. How far do you agree? Key Terms Inflation (Britain in the 1970s) British Industrial Relations in the 1970s Mixed Economy Neo-Liberalism Mixed Economy ‘Mix’ of capitalism and socialism, where: the government owns industries, provides full employment and social benefits, and institutes price and wage controls, but private enterprises and land ownership continue to be the norm Social Democracy Welfare state + mixed economy  Key to full employment and economic growth is demand Government can help to stimulate Keynesianis demand, through tax policies and m government spending -> governments should run a deficit during economic downturns in hopes of future economic growth  Limited government intervention Neo- Liberalism Private enterprise  1945-51: Labour 1951-1964: Conservative British 1964-1970: Labour (Wilson) Government 1970-1974: Conservative (Heath) s 1974-1979: Labour (Wilson, Callaghan) What were the major economic issues in Britain in the 1970s? Economic Problems of the 1970s Government debt (£54 billion in 1976) Low productivity, innovation and investment Balance of payments deficits (£1.65 billion in 1974) Low economic growth (average GDP growth 1970-79 = 3%) Unemployment (5.6% in 1977) Inflation (24% in 1975) What were the causes of these issues? Causes of Economic Problems in 1970s Britain Domestic causes: Keynesianism, Mixed Economy, poor labor relations External factors Causes of Economic Issues: Keynesianism Keynesian deficit spending applied over long-term instead of as a short-term measure => High level of government debt Causes of Economic Issues: Mixed Economy Nationalization had led to: Debt, as government was subsidizing unprofitable industries Lack of competitivity Underinvestment in modernization and innovation Decline in exports Strong labor unions with a high level of strike activity -> lower productivity  Causes of Economic Issues: Poor Labor Relations 3x more work days lost due to strikes in 1970s than 1960s Days lost/worker 25x higher in Britain than West Germany  Causes of Economic Issues: Poor Labor Relations Wage demands fueled inflation in the 1970s: Inflation at 24% in 1975, annual wage rises at 29% Causes of Economic Issues: External Factors Globalization & deindustrialization End of the Bretton Woods system Oil crisis of 1973 Challenges Related to External Factors Intensification of Globalization in 1970s: Expansion of global trade due to technology and industrialization -> increased competition for British industry => deindustrialization (decline in industrial employment)  690,000 British coal miners in 1950s vs. 60,000 by early 1980s Deindustrializat ion 50% British workforce in industrial sector in 1950s vs 29% in 1970s Deindustrialization Decline in number of full-time, salaried positions in manufacturing sector, contributing to frustrations End of the Bretton Woods System Causes: U.S. dollar overvalued, since U.S. gold reserves did not correspond to high number of U.S. dollars in global circulation Traders sell dollars in periodic ‘runs’ https://history.state.gov/milestones/1969-1976/nixon-shock  In 1971, U.S. President Richard Nixon End of the suspends the dollar’s convertibility Bretton into gold: https://www.youtube.com/watch?v=r Woods cnhF09QN78 System End of December 1971 Smithsonian Agreement: Bretton G-10 agreed to new set of fixed Woods exchange rates around a devalued System dollar  In 1972, the E.C. agreed to jointly End of float against the U.S. dollar (‘currency snake’ - precursor to ERM) Bretton Woods In 1973, the U.S. again devalued the System dollar following market speculation, ending the Bretton Woods System  From there, states can choose own exchange rate mechanism: End of Free float (e.g. US, UK, Canada, now EU) Bretton Managed float within band (e.g. India, Singapore) Woods Pegged exchange rate/Crawling peg (e.g. System Nicaragua) Fixed exchange rate (e.g. Saudi Arabia, Bahamas)  Fewer concerns about devaluation and currency reserves Consequenc es for Britain Unpredictability in short term Oil Crisis of 1973 Following the Arab-Israeli War of 1973 (Yom Kippur/October War), Organization of Petroleum Exporting Countries (OPEC) retaliated against supporters of Israel through an oil embargo and a reduction in oil production => Energy prices quadrupled in 1973 https://www.youtube.com/watch?v=VCLRlVxOH-Q https://www.bbc.co.uk/sounds/play/p029718m How did British governments in the 1970s seek to address these challenges? Conservative Edward Heath Government, 1970-4 Labor Relations: Context Previous governments had failed to curb strike activity (e.g. Labour Party White Paper ‘In Place of Strife’ in 1969)  Conservatives pass Industrial Relations Act of 1971 Required registration unions Labor Relations Created court to resolve industrial disputes and cases of ‘unfair industrial practice’  Response: Industrial Non-cooperation in registration Relations Act of 1971 National Union of Miners announced strike in 1972 Miners’ Strike of 1972 Ended in pay increases of 27% Three-day week in 1974 Oil crisis + renewed Miners’ strike => Heath declared State of Emergency in Dec. 1973 and limited commercial electricity use to 3 days a week from Jan. 1974 Three-day https://www.theguardian.com/politics/gallery/2009/ apr/16/past-conservatives week  Consequences: Three-Day Miners won 35% wage increase in Week in March 1974 1973 Contributed to Conservative loss of elections of October 1974  Inability to limit power of unions Edward British entry into the European Heath’s Economic Community in 1973 Premiership ‘U-Turn’  Return to price and wage controls Nationalization of Rolls Royce in 1971 Heath’s U- £34 million subsidy to Upper Clyde Turn Shipbuilders => Keynesianism and a mixed economy continued Labour Governments of 1974- 1979 Harold Wilson 1974-6 James Callaghan 1976-9 Labour Continuing economic problems: Government balance of payments, inflation s of 1974- Poor labor relations 1979  Inflation rate of 24% Britain in 1975 Unemployment rate of 7%  Causes: Government spending, wage increases, oil crisis Consequences: Savings lose value Inflation If employers don’t raise wages at same rate as inflation, real wages decline Solutions? Raise taxes and/or interest rates Cut government spending 1976 IMF Loan To help resolve economic issues, the government went to the IMF for a loan  Loan conditionality 1976 IMF Austerity measures: cuts in Loan government expenditure, rise in taxes and interest rates, pay restraint  Acceleration of Chancellor Healey’s efforts to bring down inflation 1976 IMF Easily repaid due to overestimation Loan government debt But perceived ‘humiliation’, ‘betrayal’  By 1978, inflation down to 8% Industrial Callaghan calls for 5% cap on wage Unrest increases Anger of low-paid workers, unions  All 23 Ford Motors plants went on strike over pay rise limitations in Sept. Industrial 1978, leading to 17% pay rise Unrest No sanctions from government Industrial Unrest Lorry drivers’ and railway workers strike Jan. 1979 -> panic buying, energy shortages Winter of Discontent, 1978-9 PM Callaghan on return from ‘Big Four’ summit In Caribbean, Jan. 1979 Winter of Discontent 1978-9 Public sector employees go on strike, including garbage collectors, school caretakers, health workers, airport staff, grave diggers  Protest cap on pay rises (ask for 20- Winter of 50% instead of 5) Discontent, 1978-9 Calls for higher minimum wage and 35-hour week Winter of Discontent https://www.youtube.com/watch?v=8vCQ0ebTaLk https://www.youtube.com/watch?v=Je65Vw7ndro https://www.youtube.com/watch?v=ksJeJp6aOJk http://www.unionhistory.info/britainatwork/videodisplay.php?irn=1062 Winter of Discontent Results: Pay increases (e.g. 24% civil servants) Public opinion against unions (84% British thought unions too powerful) Elections, with Conservative victory assured  3x more work days lost due to strikes in 1970s than 1960s Industrial unrest Days lost/worker 25x higher in Britain than West Germany Situation by 1979 Perceived failure of postwar consensus on Keynesianism, the mixed economy and the Welfare State High government spending had contributed to inflation and government debt Failure to ensure full employment Low industrial productivity Poor labor relations Crisis of power: ‘Who governs Britain?’ Key Issues How far do you agree that inflation was the key factor in Britain’s economic problems in the 1970s? How justified were right wing criticisms of Social Democracy in Britain in the 1970s? Britain’s economic problems were largely brought about by factors beyond their control. How far do you agree? What is Neo-Liberalism and how did its supporters propose to change Britain?  Not really new, just newly popular Neo- Return to principles of Classical economic thinking going back to Liberalism Adam Smith Laissez-faire: limited government intervention Neo-Liberalism in the 1970s & 80s Milton Friedman Friedrich von Hayek Thatcher & Reagan Tenets of Neo-Liberalism Governments should not set prices, own major industries, or attempt to plan the economy Productivity and innovation will improve only through competition between private enterprises Privatization & deregulation Neo-Liberalism vs. Keynesianism Neo-Liberal focus on inflation vs. Keynesian focus on unemployment Government intervention Deficit spending Friedrich von Hayek, The Road to Serfdom “The various kinds of collectivism, communism, fascism, etc., differ between themselves in the nature of the goal towards which they want to direct the efforts of society. But they all differ from liberalism and individualism in wanting to organise the whole of society and all its resources for this unitary end, and in refusing to recognise autonomous spheres in which the ends of the individuals are supreme. In short, they are totalitarian in the true sense.” Friedrich von Hayek, The Road to Serfdom “Self-interest is not myopic selfishness. It is whatever it is that interests the participants [in the voluntary exchange], whatever they value, whatever goals they pursue. The scientist seeking to advance the frontiers of his discipline, the missionary seeking to convert infidels to the true faith, the philanthropist seeking to bring comfort to the needy – all are pursuing their interests, as they see them, as they judge them by their own values.” Monetarism First advanced by U.S. economist Milton Friedman Focus on money supply as key to inflation Restriction of money supply, cuts in government spending in order to curb inflation https://www.youtube.com/watch?v=YWrWQ4TUVW0 Milton Friedman Quotes “When everybody owns something, nobody owns it, and nobody has a direct interest in maintaining or improving its condition. That is why buildings in the Soviet Union -- like public housing in the United states -- look decrepit within a year or two of their construction.” “Nothing is so permanent as a temporary government program.” “I am in favor of cutting taxes under any circumstance and for any excuse, for any reason, whenever it's possible.”