Economics
Introduction
The Golden Age was an important and unusual period in terms of economical development for the history of world economical affairs. During the time of about 25 years almost all of European countries were expanding their economies at approximate rates of at least 5 % GNP increase per annum – a significant growth, taking the just ended World War II and the destruction that it has brought into consideration. What is also unusual is that economic expenditure was followed by an equally strong rates of employment, which made a state of practically full employment possible for most of European countries, thus making their economies highly efficient and profitable. As the Long Boom (Golden Age) lasted long and turned out in such a success for world economy, it got recognized, by the scholars, to be a new standard for capitalist economies rather than just being an exception. This phenomenon has become a new, unknown before model of economic development for European countries that was to be based on cooperation between government, employers, and workers, which resulted in economical boom throughout the world (mostly Western Europe though).
Keynesian Economics
Keynesian economics (Keynesianism) is an economical theory, the most essential ideas of which are centered on the principles of aggregate demand, which was believed to be the driving force of the development. Its founder, English economist John Keynes defined the level of national output and rates of employment to be predetermined by the changes in aggregate demand in the short run, especially during the times of economical instabilities. He clearly emphasized that the state of aggregate demand is not only one factor dependable, therefore being influenced by numerous components, affecting levels of production, employment and inflation rates. Public and private economic decisions are among those factors; public decisions consist of monetary and fiscal (spending and tax) policies, which are believed to be strongly affecting aggregate demand; private sector decisions, which if executed wrong, can result in poor macroeconomic results that, in order to stabilize the aggregate output, will require an active response with monetary and fiscal policies in particular (public sector). Though the concept’s idea of macro-level trends overruling the micro-level behavior, Keynesian scholars still advocate the mixed model of economy, being dominated by a private sector, but with an option for a government intervention in the times of downturn. As Keynesians consider prices (especially wages) as factors, being dependant on the state’s aggregate demand, they try to convince that this particular component reacts on any changes slower than other, which might lead to periodic shortages and surpluses (labor employment). From this thought comes another concept about the inefficiency of the typical levels of unemployment. Professors that are in favor of Keynesianism consider stabilization policy, done by the government, to be reducing the amplitude of the business cycle, which they rank to be one of the most essential existing problems. But this does not mean that Keynesian proponents support fine-tuning, which means season adjustments in government spending, taxation rate, and finally money supply, done by the government to keep economy at the levels of full employment. Almost all of today’s economists suppose that the governments simply cannot have enough information just on precise time to make fine-tuning work.
The central conclusion of Keynesian economics proves that combating unemployment is rather efficient, than actually trying to tame inflation rates. It has been noticed that the final costs of low inflation are way smaller, than the cost of high unemployment, which is also able to destabilize economy as a system.
The Golden Age and collapse of the system
The Golden Age is a period being dominated by capitalism, known for the escalation of rapid economic growth and free trade starting with the end of WWII. It was lead by the United States, spread throughout the Western Europe, and few second world countries, and took place from 1945 to 1972. It is highly important to clarify though, that this period is only relevant to the terms and reasons of capital accumulation and growth of welfare states in centralized capitalist economies, first in Western Europe, then Japan and finally the United States of America, without being in any regard to conditions of social life around the world.
In order to understand the process of development during the Golden Age, referral to statistical data is needed, which clearly shows the created conditions for high investment rates, output growth, as well, as low inflation and low unemployment rates worldwide. This trend was possible due to a great political compromise with the upper society and the upper and middle working classes that was carried out in the form of Keynesian fiscal and monetary policies. High profits and GDP growth made it possible to redistribute wealth from the increased rates of production back to the working class in the form of real wages growth (inflation adjusted). As result, market of mass-produced goods grew due to rise in the middle-class demand.
Another crucial point that allow Golden Age to happen is the enhanced potential for economic growth by the favorable ration of human to physical capital, matching of the transferable technology to emerging demand patterns, and finally the creation of institutions, that helped economies to grow via clear bureaucracy and healthy competitive environment for industry.
The astonishing results of the Golden Age can be reviewed, taking Germany as example. The West European economies recovered after the war aftermath fairly quickly, with Germany reaching its pre-war production levels in 1948. This particular country then saw continuous economic growth starting with early 1950’s with industrial production levels doubled from 1950 to 1957, and GNP growing at whopping 10% per year, in this way transforming into the leading production force of the whole Western Europe. These rapid rates of economical recovery partially became possible due to the Marshall Aid - a series of money transfers and direct investments, that were used for reconstruction of Western Europe that started in April 1948 and lasted four years, providing the financial aid to Western Europe in the amount of $13.365 billion total ($1.4 billion of that sum went to Germany). In Germany 57% of imports were financed by this aid through 1947-49, which peaked at 5% of GDP and continued remaining at 2.3% for five years straight, thus helping Germany to reach pre-war production rates in a short time.
Despite the astonishing success of this period, by the late 1960’s Long Boom started to exhaust itself, delivering less profit every year, thus slowing the wheels of world economy down. Further in time, the international economy suffered a huge financial shock with the end of the gold convertibility of US Dollars and the actual collapse of the Bretton Wood currency system. Combined, these mishaps provoked dramatic shifts in international relations, shaking the central core of the global economic system.
Monetarism and Monetarist Economic Policies
The first damage done by failure Keynesian economic policy during crisis of the 1970’s was to the policy itself. The collapse was marked by unprecedented high inflation rates together with high unemployment rates – the phenomena Keynesians later failed to explain. This process was called stagflation, and to overcome it Keynesian theorists suggested causing some unemployment; this became to be a failure point for the credibility of Keynesian anti-recessionary measures. Stagflation caused great difficulties for public financing; in addition to that it disrupted the world's ability to make accurate economic forecasts. Such a negative performance by Keynesian economics resulted in adopting the restrictive Monetarist policies.
Monetarism is an economic school, which made an emphasis on the macroeconomic effects of the supply of money, and which makes it to be the key feature of the demand in the short-run economy. This theory began with two opposing ideas: the classic hard money policy, which was the major economic thought of the late 18th century, and the innovative concept of John Keynes, whose demand-driven model made revolutionized the foundations of macroeconomics. But the difference between two theories is, whereas in Keynesian concept was focused on the currency stability, disregarding the possible instabilities with inefficient money supply that could cause the currency collapse, and Monetarist, in which the focus was made on price stability, as a way to stabilize and equalize money supply and demand.
Such a transfer from one concept to another did critically change the way governments and central banks persuaded the main aims of fiscal and monetary policy.
Conclusion
In the conclusion I would like to stress that the Golden Age economic model helped multiple countries to explode with economic and social prosperity, moreover it is still functioning today. Even though the economic growth has not been reached by every particular country in Europe or elsewhere around the world, this concept proves to be useful to an overall economic performance, especially in the field of employment and un-employment rates. Despite collapsing and turning out to be inefficient, with some revision applied, this concept might lead to another economic boost, ensuring almost full employment, leading the increased real wages and nations’ incomes in rich as well as poor countries.
References
Blinder, A., S. (2008). Keynesian Economics. Retrieved from: http://www.econlib.org/library/Enc/KeynesianEconomics.html
Epstein, G., Schor, J. (1988). Macropolicy in the rise and fall of the Golden Age.
Singh, A. (2008). Historical Examination of the Golden Age of Full Employment in Western Europe. Retrieved from: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CFcQFjAF&url=http%3A%2F%2Fwww.cbr.cam.ac.uk%2Fpdf%2FAnnual_Report_2008.pdf&ei=YlzEUbjgNITy7Aal04HQCA&usg=AFQjCNEy0gx44wGVeMpJ6R5_sTa1llRZdg&sig2=RX7vLvfcN9W5Md4dIAcc0Q&bvm=bv.48293060,d.Yms
Toniolo, G. (1998). Europe’s Golden Age, 1950 – 1973: speculations from a long-run perspective. Economic history review ( LI, pp. 252 -267).
Williamson, S., Wright, R. (2008). New Monetarist Economics. Retrieved from: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CGEQFjAG&url=http%3A%2F%2Fwww.artsci.wustl.edu%2F~swilliam%2Fpapers%2Fnewmonetarism.pdf&ei=DXHEUcOqK8GEtAbd6oCQDA&usg=AFQjCNHaaxyvRzv3ATmKXiLjgHZ1KUzu8Q&sig2=DGjYi9ZtctSGWgKavyPEpQ&bvm=bv.48293060,d.Yms
