The Golden Age of Capitalism after WW2 PDF

The Golden Age of Capitalism after WW2 Contents of this chapter 1. The Golden Age in long-term perspective 2. Postwar recovery and convergence on the US: description 3. Why? a. Why was post-WW2 recovery different? b. Explaining convergence: Growth accounting framework...

The Golden Age of Capitalism after WW2 Contents of this chapter 1. The Golden Age in long-term perspective 2. Postwar recovery and convergence on the US: description 3. Why? a. Why was post-WW2 recovery different? b. Explaining convergence: Growth accounting framework c. Interpretation: Becoming more like the productivity leader, the US 4. The end of the golden age 5. Bibliography 6. Appendix Key questions a) How was economic reconstruction in the short and medium run after 1945 different (institutionally, socially, etc) than after the First World War? b) What role did the Bretton Woods system as an international monetary policy regime in this, and how was it it different from the interwar gold standard? c) What were, following from the use of growth accounting, the main sources of fast growth in Western Europe and Japan? Can they be linked to (a) and (b)? d) Why did the Bretton Woods system collapse? Why did the Golden Age "end" in the early 1970s? What do both have in common and how are they connected to (a-c)? e) To what extent is the story told on these slides representative of the World? f) And what does all this have to do with Keynes (second part)? g) Why is this the golden memory of our parents and grandparents (if they are from the Western World)? 1 1. The Golden Age in long-term perspective Why is it called “the Golden Age”? Annual real GDP per capita growth rates for the world 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1500-1820 1820-1870 1870-1913 1913-1950 1950-1973 1973-1998 1998-2010 Based on Maddison dataset, 2013 version, data for before 1820 in many cases from Maddison dataset, 2008 version, and other sources. Link to website at Groningen Growth and Development Centre. Somehow “the world”, but not every country, made up on lost growth from the interwar and war periods 1914-1945/50. What is this? What explains it? Annual GDP pc growth 1950-73 vs GDP per capita in 1950 10 8 Japan 6 4 Ireland Switzerland USA 2 0 0 2 000 4 000 6 000 8 000 10 000 12 000 Calculated with Maddison dataset, GDP per capita in 1990 international US Dollars in 1950 on the horizontal axis, annual ‘real’ average growth rates of GDP per capita on the vertical axis. Convergence and catch-up growth: transfer of technology, organizational know how and institutions enable initially poorer countries to grow faster. This was discovered by Robert Solow, William Baumol and others in the 1960s, using data for a relatively small sample of (mostly) Western countries – similar to the data in the graph above. 2 … but only if they (can) learn from the richest/most efficient – whole world. Annual GDP pc growth 1950-73 vs GDP per capita in 1950 10 8 6 4 2 0 0 2 000 4 000 6 000 8 000 10 000 -2 Horizontal axis GDP per capita in 1950 (in 1990 USD), vertical axis: Annual average growth rates 1950- 73. Calculated with Maddison dataset. Katar, United Arab Emirates and Kuwait to the right of the US outside the graph (but included when calculating trend line).. Western convergence in comparison (same graph as p. 2 above, with more detail). 3 The ‘Golden Age’ in comparative perspective: Western Europe, UK, Japan, China, Latin America, Africa, Eastern Europe, and the US 9.0 4.5 8.0 4.0 3.5 7.0 3.0 6.0 2.5 5.0 2.0 4.0 1.5 3.0 1.0 2.0 0.5 1.0 0.0 0.0 -1.0 UK Western Europe Total World Japan Total World 10.0 3.5 3.0 8.0 2.5 6.0 2.0 4.0 1.5 1.0 2.0 0.5 0.0 0.0 -2.0 China Total World Latin America Total World 4  3.5 6.0 3.0 5.0 2.5 4.0 2.0 3.0 1.5 2.0 1.0 1.0 0.5 0.0 0.0 -1.0 -0.5 Eastern Europe and (Former) USSR Total Africa Total World Total World 3.5 4.5 3.0 4.0 3.5 2.5 3.0 2.0 2.5 1.5 2.0 1.5 1.0 1.0 0.5 0.5 0.0 0.0 USA Total World USA Western Europe Total World The Golden Age looks largely like a convergence of Westen Europe and Japan on the US, although also in most other parts of the World growth rates were higher than ever (even in the US, which grew less than Western Europe and the World average, but had grown faster than Europe and World average since at least 1820). Eastern Europe also performed better than the world average, but less than Western Europe in the golden age (and that growth seems to have been unsustainable in the medium run). Africa, Latin America and China grew less – and this might explain why the ‘world convergence’ graph on p. 3 is a flat line. It is also interesting to note that after 1973 the US again grew faster than Western Europe, and that overall the world average growth rate from the 1990s is driven by different countries than in the 1950-73 period (China, Eastern Europe, etc.) – week 7 explores that. 5 The ‘Golden Age’ was also marked by a return to trade globalization in trade, especially in Europe and other ‘Western’ countries (not everywhere). The jump in the 1970s has to do with increasing oil prices (that make this central trading item at the time more expensive and thus the share of trade increase). (import and) export to GDP ratios – the end of the first globalization (see script 4, p. 1, script 5, p. 2) https://ourworldindata.org/grapher/globalization-over-5- Source: Federico and Tena-Junguito (2017), centuries-km , probably also used in Crespo/Essletzbichler http://hdl.handle.net/10016/22355 Especially in Western countries, tariffs were dismantled (while some of the former ‘periphery’ tried import-substitution behind high tariffs – e.g., India, Argentina – or government takeover of the economy under centrally planned socialism; we come back to both in weeks 7 and 8). Note that international finance did not reintegrate as much until the late 1970s/early 1980s. The breakdown of international finance (left) and rise of trade protectionism (right) Average tariff rates (taxes on imports), percent of import value, 1900-2000 Source: Obstfeld and Taylor (2004), p. 127. Source: Tariff revenue as percent of import value, data from Lampe/Sharp (2013) The re-integration of international commodity markets, but the slow reconstruction of international finance was part of a new international financial system that repressed financial flows across countries to assist the ability of governments and central banks to stabilize economies with macroeconomic policies: The Bretton Woods system. 6  Source: Persson/Sharp (2015), p. 195 – text is uploaded as Econ Hist background reading The gold standard forfeited monetary autonomy (see week 5 about the consequences), the Bretton Woods system forfeited unrestricted international finance/capital mobility (today we forfeit – outside the Eurozone – fixed exchange rates). The Bretton Woods period (ca. 1950 to 1971/3) was accompanied by remarkable macroeconomic stability, and, see above, high growth rates. This script tries to disentangle how all this hangs together. Median annual inflation rates, 70 countries, 1945- Banking crises in 70 countries (% of countries suffering one), 2011 1900-2008 20.00 45 15.00 40 35 10.00 30 5.00 25 Percent of counties 0.00 20 1924 1900 1906 1912 1918 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 15 -5.00 10 -10.00 5 70 countries United States -15.00 0 19001910192019301940195019601970198019902000 based on data underlying Reinhart and Rogoff (2009), Fig 12.1 Source: Reinhart and Rogoff (2009), p. 74 (link). (link). 7 2. Postwar recovery and convergence on the US: description Growth after 1945: postwar recovery Why so much growth after 1945 – simple start: much destruction and disruption allows for rapid reconstruction and restoration of existing capacities. Coventry November 1940 Vienna 1945 Source: see here. Source: Austrian National Library These images look dramatic (and they were), but in terms of destroying industrial capacity the bombings were only partly effective. Large parts of the bombings were not directed towards (heavily protected) industrial plants, but to easily identifiable large cities, both by the Germans/Nazis and by the Allied Forces. The strategy, especially of the Royal Air Force, was to “strike hard, strike sure” and to evade large losses due to flaks, etc., and therefore were directed at historical city centers, etc. Destructions of bridges and railway lines, which interrupted supply to cities and transport networks, could be repaired relatively fast after the war. In West Germany, and other countries, investment rates during the war were very high (consumption was often repressed), so productive capacity increased as part of the war effort, and destructions were relatively small in comparison, so that overall physical capital stock increased during the war The physical capital stock of an economy (remember growth accounting in class 3, pp. 6-7) is a central production factor comprising mainly manufacturing plants and equipment, built infrastructure, transport equipment, etc. The main problem in Germany at the end of the War was the displacement of population to the countryside (as a consequence of city destruction and market disintegration) and hence labour shortage in the cities (only 56% capacity utilization in late 1948 and 69% in 1949; Vonyo 2012) In comparison to Western Germany, the Soviets dismantled plants, etc., in the East after 1945, and the physical capital stock there was reduced to about half the 1939 level 8 West German industrial capital stock (1938=100), estimates by Vonyo (2014) The Nazis invested a lot in heavy industry (not so much in consumer goods), and the Allies did not destroy everything during the war. Second World War: GDP per capita Calculated with the Maddison dataset 9 A new growth path (for a few decades at least): Germany, real GDP per capita in 1990 int. US dollars 100 000 Germany 1870-1913 Germany 1950-1989 10 000 1 000 1870 1875 1945 1950 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1955 1960 1965 1970 1975 1980 1985 Calculated with Maddison dataset, inspired by Bittner (2001). Austria, real GDP per capita in 1990 int. US dollars 100 000 Austria 1870-1913 Austria 1950-1989 10 000 1 000 1870 1910 1950 1875 1880 1885 1890 1895 1900 1905 1915 1920 1925 1930 1935 1940 1945 1955 1960 1965 1970 1975 1980 1985 Sources are the same as for the graphs on pp. 2 and 3 (the Maddison dataset). 10 So, in Austria and Germany, but also in many other Western European countries, GDP per capita growth is much faster than before 1914. Initially, this might be due to postwar reconstruction, but from the late 1950s, both countries (and others in Western Europe) grow above the old path. This is probably because at least until the late 1970s a new growth regime arrives in Europe, which was developed in the United States, which had higher growth rates than most of the World at least since the 1870s. The transfer of this model and the underlying characteristics – discussed in the next session, explain the convergence of Western Europe on the US, as depicted in the lower graph on p. 2. On p. 2 we also see that this, to an even more astonishing degree, was the case in Japan as well. The graph on p. 3 reminds us that the transfer of this model, and participation in Golden Age growth, was globally uneven, although also on that graph almost all countries have positive average yearly per capita growth rates (the fastest growing country in the graph on p. 3 is Libya, by the way, whose oil boom coincided with the golden age). The graph below illustrates the extent and timing of catch-up growth relative to the US. Western Europe (which includes Greece in Maddison’s classification) stood at below 50% of US per capita income in 1950 and caught up to some 70% on average (individual Western European countries came closer to the US level). Japan caught up rapidly from 20 to 65% between 1950 and the early 1970s, and then somewhat slower to 85% in the early 1990s, before falling back in a prolonged crisis. The Asian Tigers (South Korea, Taiwan, Hongkong and Singapore) had a similar experience between the late 1960s and 1997, a shorter crisis, and continue to catch-up. The catch up of mainland China started around 1980 and took off around 2000, from less then 10% to (by 2010) some 25% of the US level, and has continued since then. Convergence: different countries’ GDP per capita as a share of US GDP per capita, 1950-2010 (1=same level as US, 0.7=70% of US level) 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1952 1974 1950 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Western Europe China Japan Asian Tigers (mean) 11 3. Why? a. Why was post-WW2 recovery different? So, what were the lessons learned from the devastating record of post-WW1 reconstruction? (1) The postwar economic consensus in Western Europe: cooperation and welfare state Despite early ideas, Germany was not “punished” by reparations (as after WW1), but was controlled and integrated into a (Western) European cooperation that started with the European Coal and Steel Community (ECSC) in 1950, and eventually became the European Union With the Marshall plan, the US helped Europe, but required European countries to cooperate and make joint proposals for help – the OEEC (later OECD) was set up for that European integration went further: the European Payments Union, a multilateral mechanism to overcome “dollar shortage” in Europe and help European trade Cooperation also gained importance at the national level trade unions gained political and economic voice (in part due to labour shortage/dislocation in the postwar reconstruction). firms and trade unions entered a “pact”, in which the former would make productive investments to assure reconstruction and growth and the latter would moderate their struggle for higher wages, etc., to make possible future growth (in part a lesson learned from conflicts over adjustment to changing conditions in the 1930s) labour representation in company boards was part of making the deal credible for workers The state also gained a more active role in the economy part of the enterprise-trade union cooperation went beyond the limits of the firm: the welfare state was extended in many cases, especially Austria, the trade union-enterprise-government cooperation also entered the area of monetary policy, which was used to stabilize prices without severe macroeconomic consequences – enabling more active and stabilizing monetary policy than under the gold standard macroeconomic management (inspired by Keynes) was applied by governments (via fiscal policy) to avoid too severe recessions (and depressions) – what you learn in Foundations of Macroeconomics became increasingly common sense What were they afraid of? Fear of communism and system competition in the Cold War probably played a more important role. „Containment policy“ as part of the Truman Doctrine (from 1947) Something like this (see week 5) – not just from extreme right wing, also (in the Cold War context) from revolutionary left wing (backed by USSR) Source: Persson and Sharp (2015), p. 217 12 An answer: Increase in social transfers (as % of GDP, 1930-1995) Source: Lindert (2004), p. 14. (2) Global cooperation and managed return to globalization (in the capitalist West) For the cooperative coordination of policies in each country, sheltering the domestic economy from international turbulences was deemed key – international capital mobility was severely restricted (and controlled by central banks). All this happened within a multilaterally negotiated international institutional/organizational framework: the Bretton Woods monetary policy regime: domestic monetary autonomy and restricted international capital flows Source: Persson/Sharp (2015), p. 195 – text is uploaded as Econ Hist background reading 13 Trade was enhanced by an international agreement for stable exchange rates, the ‘Bretton Woods’ system, which however, relied on the (actually used) possibility of national governments and central banks to restrict international capital flows: all currencies that participated were fixed against the US-dollar the US dollar’s value was fixed against gold if countries had short term problems with their balance of payments (mostly because of trade balance deficits – since capital flows could be stopped/controlled), they could ask a common fund (the IMF) for help if problems persisted (‘structural disequilibrium’), they could ‘adjust’ the exchange rate (i.e., make exports cheaper and imports more expensive). The idea was to avoid the fluctuations in short-term capital in and out of countries, which played an important part in spreading the Great Depression (and was central to Keynes’ interpretation of it) Restricted to foreign direct investments (but control of profit repatriations) Trade finance was still possible, since market integration was part of the idea of peaceful collaboration [would turn out problematic later] Was this the same as the Gold Standard? No. In comparison to the gold standard, the so called international monetary policy trilemma was solved differently: under the gold standard, countries forfeited monetary autonomy (see week 5) and much of their fiscal policy freedom (to avoid fears of fiscal dominance). The Bretton Woods system forfeited unrestricted international finance/capital mobility to gain room for monetary and fiscal policy to stabilize business cycles and avoid recessions to turn into depressions but maintain trade borders open (today we forfeit – outside the Eurozone – fixed exchange rates). We see that, indeed, this led to relatively stable exchange rates (see the “Japan” dollar-yen rate below), although for some countries adjustments for structural equilibria were required, e.g., the UK initially appreciated against the dollar in 1951, but needed to depreciate again in 1967, the so-called 1967 Sterling Crisis (https://en.wikipedia.org/wiki/1967_sterling_devaluation). The France depreciated against the dollar repeatedly, while the German mark appreciated against the dollar in 1952 and 1961 (and from 1970). Exchange Rates (Local Currency Units per US Dollar), 1950–1973 Source: Meissner (2024), p. 223, based on Jordà, Schularick, and Taylor (2021). 14 At the same time, we see that indeed a large number of (even high-income) countries imposed some sort of capital controls until even the late 1980s. Percentage of countries with capital controls, by income status, 1950–2016 Source: Meissner (2024), p. 234. The idea was that long-term (direct) investments were still possible, as were payments for imports. Balance of payment imbalances could thus still arise but would not severely restrict domestic policy options as in the interwar period because the ‘we do not trust this currency’ that destabilized the interwar gold standard had no possibilities, as capital controls restricted the possibility to speculate against currencies with short term financial assets. The idea was that the IMF would help to provide funds for short term balance of payment imbalances and assist the adjustment to a new exchange rate if balance of payments imbalances were ‘structural’, i.e., returned year after year (as they had for Britain in the interwar period). Thus, policies that turned crises into depressions for the sake of saving the exchange rate and international investors’ trust were not necessary. And indeed, between 1950 and 1971, when the Bretton Woods system was operational, current account imbalances (current account/GDP ratios, see below) were cormparatively small. International capital flows in comparison to GDP were thus relatively less important, but, especially in comparison to the period before and around 1929 (before many countries imposed some sort of capital controls in the 1930s to deal with the Great Depression) and the period from the mid-1990s volatility in international capital markets was low as well (compare to the banking crisis graph above). At the same time, trade cooperation (learning from rise of protectionism in the 1930s) was facilitated by a new international agreement, the General Agreement on Tariffs and Trade (GATT), which later turned into WTO, and the World Bank (International Bank for Reconstruction and Development, IBRD) helped to fund projects, to rebuild economies or to make them more efficient – also to avoid communist uprisings (e.g., in Southern Italy or Greece). 15 Average Current Account/GDP Surplus and Deficit Countries, 1870–2013 Source: Meissner (2024), p. 85. So, international cooperation and controlled return to free(r) trade were accompanied by the unmaking of international finance Source: Obstfeld and Taylor (2004), p. 127. 16 Apart from restricting international finance, there was now also an international coordination framework, the so-called Bretton Woods organizations: International Trade Organization (negotiated 1944-48, but not ratified in US Congress), replaced by provisional secretariate for General Agreement on Tariffs and Trade 1947 negotiated instead. This turned into the World Trade Organization in 1995 International Bank for Reconstruction and Development (IBRD), 1945, [World Bank] International Monetary Fund, 1947...based on the agreements signed in July 1944 in Bretton Woods, New Hampshire, by delegates from 44 countries at the United Nations Monetary and Financial Conference to regulate and stabilize the international financial and monetary order. Interim summary: A different approach to postwar reconstruction: Internal cooperation to improve firm's productivity technology and organizational know-how improved and imported from the US (e.g., through Marshall Plan funds and initiatives) Participation of workers in boards and growth of welfare state Domestic fiscal and monetary policy with aim of active stabilization (and promotion of growth) National economies ‘sheltered’ from international financial markets through capital controls National economies integrated through foreign trade this was important for investment in scale-intensive industries like those underlying the US growth model (cars, (petro)chemicals, etc. pp) since at least the 1870s, which need large markets At least the last three points rested on the international framework of the Bretton Woods institutions and the start of the European economic integration process Organisation for European Economic Co-operation (OEEC, now OECD) to collaborate over Marshall Plan funds European Coal and Steel Community 1951 European Economic Community 1958 (Treaty of Rome 1957) b. Understanding convergence: Growth accounting framework Growing faster than the US – How can we measure and explain it? The increase in productivity per worker/hour worked leads to increases in income per person (see pp. 1-2, 10-11, and p. 17 below). but Europeans work fewer hours than Americans – this slowed down convergence of GDP per worker/per capita; this is not the case for Japan (that’s probably why Western Europe did not fully converge on the US – it opted for a different equilibrium, but we will return to the story of the 1970s and 1980s in the next session) Where does the convergence on American productivity come from? 17  Adopting a similar economic structure as in the US (especially in the most backward European countries) – i.e., industrialization increase in investment (towards a level of capital intensive US production) in all sectors, especially in industry (changes the ‘growth path’ of a country – more capital per worker means higher labour productivity) technological and organizational transfer from the US (mass production, scientific management, ‘Taylorism’) demand changes (mass consumption) – to sell the products of industry to non-Americans increasing degree of openness / integration of (European) markets, to match the large US market and make its technologies useful increase in human capital (e.g., university education), research and development, and energy use - the ultimate bases of the US’ productivity advantage How can we measure and quantify this? Remember growth accounting from week 3! The technology of growth accounting allows to separate output growth into the growth of inputs (land, labour, capital) and the growth of “joint efficiency” (total factor productivity [TFP] growth, “Solow residual”) Behind this is a neoclassical Solow-Swan Cobb-Douglas production function Y=A*L1−α*Kα, with Y=output, L=labour, K=capital, A = total factor productivity. diminishing returns to factor accumulation Constant returns to scale assume that production factors are paid their marginal products, so α, β, (1 – α- β) are shares of wage, profits and land rents in functional income distribution Dividing both sides by L allows to account for labour productivity (i.e., GDP per worker); taking (log) growth rates (as on next page and on slides in Britain in the industrial revolution in class 3) allows to explain growth of output or labour productivity, the model then becomes additive (not multiplicative). For the period after 1950, we join capital and labour into one production factor, and might include the quality of labour – human capital – and the age and quality of machines. Again, for more details see script 3 (and the background text by Crafts and Woltjer) or, on the Solow- Swan model Marginal Revolution University and/or Prof. Prettner (WU) (with the US vs Germany example). Growth accounting specifically is explained here (but not for labour productivity growth, just for GDP growth). Again, these technicalities are not part of our course If we do this exercise for 1950 to 1973 – see the table on the next slide, we see that Labour productivity (per hour) increases faster than in the US (→ convergence) [all numbers in second data column are larger than 2.50 percent per year for US] the capital stock per hour worked also increases faster than in the US US increase is 2.17% per year, in all other countries larger than 3% per year, in data column 3 But this only accounts for about ¼ of the increase in labour productivity (the changes multiplied by α=0.3 compared to column 2) capital quality increases faster than in the US (that is replacing old with new capital goods) in column 4 – most prominently in Germany and France, less so in the UK (this also might be a consequence of the larger relative war damage). 18  labour quality (human capital) increases faster than in the US (except in Germany and UK – not shown in the table) but more and better capital and better education only explains 40-50% of the difference in labour productivity growth in the mentioned countries in comparison to US (here, the difference between labour productivity [col 2] and TFP growth rates [col 6] divided by labour productivity growth rates). So, the effects of other forces must be even more important than this, since efficiency increases (TFP growth) in the use of capital and labour account for most of the productivity gains → Structural change, trade, energy use, technological and organizational innovations, better infrastructure? Growth in income, productivity and capital intensity, 1950-73 (per cent per year) Source: Crafts (2010), p. 415, and Maddion (1987), pp. 660, 664, 665. c. What did convergence mean? Becoming more like the productivity leader, the US Increasing capital intensity average investment rate (gross investment=new machines, structures, etc. in relation to GDP) in Western Europe increased from 9.6% of GDP (1920-38) to more than 20% in the period 1950- 70; even more if we believe the estimates by Carreras and Tafunell (2006) in the graph below. annual growth rates of capital stock per hour work of ca. 4% per year imply that the capital stock per hour worked more than doubled between 1950 and 1973. Japanese investment rates were even higher: 24% of GDP in the 1950s, 35% in the 1960s, 32% in the 1970s – a pattern later repeated by, e.g., China (Eichengreen and Kenen 1994, p. 23) In the US, the investment rate remained constant around 20 percent of GDP (which was significantly higher then in Western Europe in 1920s and 1930s, but somewhat less in the convergence period from 1950 – but European rates returned to that level from the 1980s). 19 Western European investment rates 1830-2000 Carreras and Tafunell (2006), http://www.helsinki.fi/iehc2006/papers3/Carreras103.pdf Slowly increasing human capital/ tertiary education Evolution of university student numbers in West Germany (big increase only after 1970) Source: Müller-Benedict (2015). Human capital: overall contribution initially small Made possible that technologies transferred from the US are used more efficiently, and that own technologies are developed, but most of it was not effective instantaneously, e.g. the increase in 20  student and university numbers is one of the most important social phenomena of the 1960s, but it took time until they finished their degrees, etc. The numbers for West Germany below are probably typical for Western Europe (and Japan), although in some countries the process started somewhat later University education is of course only one way to acquire human capital (specialized apprenticeships are another one, very popular in Germany, for example; training on the job and experience are important as well), but these existed before (and explain why in the growth accounting, see p. 17, in West Germany the contribution of more education was relatively small) Also in the US, university education expanded immensely after 1945, and the high level of tertiary education became more important after 1970, when a more knowledge and service oriented production regime emerged (as industry started to move increasingly to the Asian Tigers and other countries, globally). Many of the US technologies that were transferred in the Golden Age, including assembly lines, required combinations of skilled and unskilled labor and certain management techniques, and thus were not too dependent on mass human capital (they were also widely adapted in Eastern European planned economies, see script 8). Structural change Source: Temin (2002), p. 17. Initially more agricultural countries grew faster after 1950 because they industrialized. This leads to the question why there was so much agriculture in Western (and Eastern) Europe still in 1950. Interwar years: protectionist policies (partially to mitigate effects of overproduction – see class 5 - and especially in Germany to help “food autarky” for war time as Nazis prepared the war [in WW1, there had been a naval blockade and food scarcity in Germany]), subsidies to farmers, and crisis in industry (fragmented markets, etc.) At the end of WWII (as at the end of WWI), Western Europe therefore had an “oversized” agricultural sector, which was not really competitive this was partially maintained by the Common Agricultural Policy of the European Economic Community (~ welfare state for farmers) But in the post-1945 context the fast increase in industrial production and productivity increases industrial wages and creates demand for industrial workers 21 The conversion of (relatively) unproductive agricultural labour into (more productive) industrial labour increases the average productivity per worker (without increasing total hours worked) and hence ‘efficiency’ this effect was stronger in countries with initially more agriculture Technological and organizational transfer The first assistance of the US did not arrive in dollars, but in machines, fertilizer and raw materials; together with this help (beginning with the Marshall Plan) also arrived American technology Americanization of European and Japanese industry: Foreign direct investments in Europe by American companies and joint ventures in Japan (see Eichengreen and Kenen 1994, Table 4). rise of new industries (petrochemicals, plastics, motorcars, electrical domestic appliances) Diffusion of the Taylorist-Fordist model (standardized mass production for “standardized mass consumers”, see below) In fact, this is still under-investigated, since it requires looking at firm-level technology used and where it came from. But in the larger picture, the rise of managers, etc. is quite clear. The emergence of Japanese lean/just in time production (kanban at Toyota) is better researched (as a refinement of American practices) We also see an increase in investment in Research and Development → like in the US, the process of technological innovation becomes institutionalized within firms, although as with mass university education the fruits cannot be reaped immediately Market integration and European economic integration Much of the decline in protection and the growth in openness was, first, due to the global GATT negotiations, but from the late 1950s with the formation of the European Economic Community (that turned into the European Union in 1992), it was especially internal European trade liberalization and market integration that boosted trade. 22 Average tariff rates (taxes on imports), percent, 1900-2000 Openness (exports/GDP) 0.6 0.5 0.4 0.3 0.2 0.1 0 1942 1900 1907 1914 1921 1928 1935 1949 1956 1963 1970 1977 1984 1991 1998 2005 United states Austria (West) Germany Spain United Kingdom Tariff revenue as percent of import value, data from Lampe/Sharp (2013) Export/GDP-ratios, Federico/Tena database, constant prices (link) As a consequence, European countries traded more, and more with each other than before the European integration process started (see graph on next page). By this they became more similar to the US (which – see above, right panel) is not a particularly open economy, because most of US trade is with itself. The stable framework for European integration made market access between European countries easier and more stable and calculable. Percent of trade of EC-12 countries with EC-12 and EFTA-countries, 1958-1990 EC12=members of the European Community in 1992 (Belgium, Italy, Luxembourg, France, Netherlands, (West) Germany since 1957, Denmark, Ireland, UK since 1973, Greece since 1981, Portugal and Spain since 1986), EFTA=European Free Trade Association members in 1992 (Austria, Finnland, Iceland, Liechtenstein, Norway, Switzerland). Source: based on Sapir (1992), p. 1493. 23 Higher energy consumption Session 3 already showed for the industrial revolution that it is difficult to separate energy from other factors of production in the growth accounting framework. The industrialization process of the US was a more intensive version of the industrialization process of Britain, with Bob Allen’s explanation that machines were invented that replaced (relatively) expensive labour with (relatively) cheap coal and capital applying even more to the US, where in the nineteenth century and beyond, wages were even higher but the US Geological Survey and other initiatives created unprecedented access to cheap raw materials, first iron ore and coal, and later petroleum.1 US technologies were thus particularly capital and energy intensive, and some of this was transferred to Europe (and Japan), but not with the same intensity (as resource abundance and the wider economic environment were different). Energy intensity of production in the UK, long-run (session 3) 1000 50000 100 5000 500 10 1856 1560 1597 1634 1671 1708 1745 1782 1819 1893 1930 1967 GDP capita 1990 US$ Per capita energy consumption (GJ) Increasing energy consumption in the UK, 1945-91 200 180 160 140 120 100 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 Per capita energy consumption (GJ) Source: Warde (2007) and sources as in week 3. 1 Actually, Allen’s explanation of the industrial revolution in Britain was first proposed by John Habakkuk in 1962 to explain the machine and energy intensive industrialization in the US in the 19 th century. Allen ‘exported’ this thesis to the United Kingdom for the 18th Century (see https://en.wikipedia.org/wiki/Habakkuk_thesis for an introduction and references). 24  Context: Energy consumption per capita in the UK, the US and others (again, in GJ), 1950-91 400 350 300 250 200 150 100 50 0 1962 1968 1950 1953 1956 1959 1965 1971 1974 1977 1980 1983 1986 1989 United Kingdom Germany Austria Spain China United States Sources: U.S. Energy Information Administration. Annual Energy Review. Total Energy. https://www.eia.gov/totalenergy/data/annual/; Our World in Data. Energy use per person, https://ourworldindata.org/grapher/per-capita-energy-use and Warde (2007). 4. The end of the golden age The Golden Age ends in 1973 with the first Oil Crisis. However, this “shock” is not the only and maybe not even the most important reason. Growth already slowed down since the late 1960s. The ‘death blow’ was the end of the Bretton Woods system. The sources of growth ran dry: Convergence: from Germany to Portugal mass production had been adopted, etc., so gap to the US had closed more and more Structural change: had taken place (and Common Agricultural Policy retained the remaining agricultural work force) “Eurosclerosis”: in the integration process, rapid intra-European trade growth slows down It has also been argued that the “pact” between firms and trade unions weakened as new generations who had not experienced the Great Depression, etc., but postwar full employment entered the labour market This is related to discussions about whether inflation can reduce unemployment when trade unions understand the effect of inflation on real wages (discussions about the Phillips Curve, maybe familiar from Foundations of Macroeconomics?). Problems of the Bretton Woods system that led to its collapse in 1971/73 Although the international movement of capital between countries was restricted (difficult), actors on capital markets found ways to do so. 25  since international trade finance was (increasingly) possible, this could be used for short term international finance, e.g., by delaying payment of goods or forwarding money in advance to “speculate” about “fundamental disequlibria” (increasing current account deficits) and increase pressure to devaluate. Central banks lost a part of their ‘protection’ from international financial markets – and the price of this ‘protection’ also became more obvious as time went by, initial fixed exchange rates became less in tune to the relative performance of economies: short-run and structural imbalances became more common, and with them expectations of devaluation this implied that domestic monetary policy increasingly had to focus interest rates on maintaining existing parities and adapting to those in the US (instead of the domestic economy) US itself was also a problem: Changing the value of the dollar in gold was initially not an option for them, but the Vietnam War led to budget deficits, expansionary monetary policy and increasing inflation. European governments had to “import” this inflation or appreciate their currency. This happened e.g. in West Germany in 1961 and 1969 (the “strong mark” is born) in 1971, the US had to devaluate the Dollar against gold, and in 1973 gold convertibility was abandoned (because inflation went on). That destroyed the Bretton Woods system. it would probably not have survived anyway, because with the growth of other countries, more and more dollars (and gold) were needed to back their currencies/money in circulation 26 5. Bibliography Findlay, R., O’Rourke, K.H. (2007). Power and Plenty Trade, War, and the World Economy in the Second Millennium. Princeton University Press. N.F.R. Crafts (2010), “The Contribution of New Technology to Economic Growth: Lessons from Economic History”, Revista de Historia Económica 28, pp. 409-440. Maddison dataset, https://www.rug.nl/ggdc/historicaldevelopment/maddison/ Maddison, Angus (1987). “Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment”, Journal of Economic Literature 25(2), 649-698. Eichengreen, Barry, and Peter B. Kenen (1994). “Managing the World Economy under the Bretton Woods System: An Overview.” In Peter B. Kenen, ed., Managing the World Economy Fifty Years after Bretton Woods. Washington, DC: Institute for International Economics, 3-57. Bittner, Thomas (2001): Das westeuropäische Wirtschaftswachstum nach dem Zweiten Weltkrieg. Münster: LIT. Graphs and Tables Presentations by professors Carlos Santiago, Jordi Domènech, Joan Rosés, Juan Carmona, Stefano Battilossi. Reinhart, C.M., Rogoff, K.S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press. Crafts, N.F.R., Tonniolo, G. (2010). Aggregate Growth, 1950-2005. In: S. Broadberry/K.H. O’Rourke (eds.). The Cambridge Economic History of Modern Europe, Cambridge University Press, vol. 2, ch. 12. Vonyó, T. (2012): The Bombing of Germany: The Economic Geography of Wartime Dislocation in West German Industry, European Review of Economic History (2012) 16 (1), 97-118. Vonyó, T. (2014). The Wartime Origins of the Wirtschaftswunder: The Growth of West German Industry, 1938-55, Jahrbuch für Wirtschaftsgeschichte/Economic History Yearbook 55(2), 129-158. Persson, K.G., Sharp, P. (2015), An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present, Cambridge University Press. Obstfeld, M., Taylor, AM. (2004). Global Capital Markets: Integration, Crisis, and Growth, Cambridge University Press. Meissner, C.M. (2024). One From The Many: The Global Economy Since 1850, Oxford University Press, available online with WU-VPN: https://academic.oup.com/book/55793. Jordà, Ò, Schularick, M., and Taylor, A. M. (2021). Jordà-Schularick-Taylor Macrohistory Database. Downloaded by C.M. Meissner on 10 October 2021 from https://www.macrohistory.net/database/, where updates are still available. Lindert, P. (2004). Growing Public. Vol. 1: The Story: Social Spending and Economic Growth Since the Eighteenth Century. 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