Views of Economics Following WWI

• In the decades following the First World War, counties such a Britain, USA, and Canada all implemented changes to the role of the state.

• There was a growth in the implementation of the principles of liberalism, particularly in relation to trade, international cooperation, and foreign aid.

• The idea of providing a “social safety net” expanded

The Postwar Canadian Economy:The government started several programs characteristic of the welfare state:

• Universal healthcare• Canadian Pension Plan• Foreign Investment Review Agency – later

renamed Investment Canada – geared toward monitoring take foreign investment

• The Canadian Radio and Television Commission• Atomic Energy of Canada Limited

(pg 215 for more information)

Duplessis of Quebec Policies supporting the creation of a

welfare state:Policies opposing the creation of a welfare

state:

Use page 215-216 to complete the chart

The Quiet Revolution (1960s) in Quebec eventually brought about the strengthening of social programs characteristic of the modern welfare state.

Economic Crisis of the 1970s• As you know from

Social 20, the Middle East has long been a hotbed for conflict.

• In the 1970s, the problems of the Middle East had an adverse effect on the economies of the West.

Review of Israel • Balfour Declaration (1917)

– British document that promised a Jewish homeland (Zionists) in British-controlled Palestine.

• This became problematic as large numbers of Jewish settlers (roughly 385 000) which flooded into this area would clash with the Arabic population already living there.

• Between 1936-39 , the Arab Rebellion occurred. The creation of the League of Arab States resulted.

• The Arabs revolted against the British and murdered innocent Jews.

• British scared of continued violence decided to stop immigration.

• Zionists felt betrayed but their hands were tied (Hitler or Britain).

The Creation of Israel• In May of 1948, the UN partioned

Palestine and created the Jewish state of Israel.

• Jerusalem was to remain a UN mandate.

• Zionists agreed with partition the Arabs did not.

• As a result, a number of conflicts arose, including the Arab-Israeli War (1948), the Suez Crisis (1956), the Six Day War (1967). Generally, even when attacked, Irael, with the support of her allies, was the victor.

• When Israel refused to negotation for the return of land gained during these wars, egypt and Syria staged a surprise attack which became known as the Yom Kippur War (1973)

The Yom Kippur War (1973)• The Israelis are caught off

guard and they suffer heavy losses during initial phase of war.

• The U.S., Israel’s ally, airlifts war material to the Israelis while the Soviets do the same for the Egyptians.

• This is typical of conflicts during the Cold War Era.

The Yom Kippur War (1973)

• The Israelis eventually turn the tables on their attackers and threaten the Syrian capital, Damascus.

• U.S. pressure reins the Israelis in and eventually the UN brokers a ceasefire.

Energy Crisis (1973)• The Arabs, frustrated by

the loss of the Yom Kippur War seek to punish Israeli’s allies.

• OPEC (The Organization of Petroleum Exporting Countries) declares an oil embargo on the nations of the West, specifically the US and the Netherlands

• OPEC also slowed the production of oil – causing prices to quadruple.

Energy Crisis and the West• Oil shortages wreak havoc with

industrialized economies and force gas rationing in the U.S.

• Goods became more expensive, causing rising inflation and the slowing of the economy.

• The embargo will only last for 5 months but the Arab states now become keenly aware of the power of oil.

• In 1971, the USA had withdrawn from the Bretton Woods Agreement – which used the gold standard to set the exchange rate between countries. As currencies floated freely on the world market, this too caused inflation.

• Thus, inflation and a recession occurred at the same time. This is called stagflation.

Changing Perspectives on Economics• Stagflation adversely effected the British

economy; in 1976, the British government was forced to borrow US$3.9 billion from the International Monetary Fund.

• Inflation caused the cost of running social programs to increase, yet the slowing of the economy meant governments could collect less tax revenue.

• The result was an increasing deficit and no means to repay the debt.

See British Prime Minister James Callaghan’s speech and the chart on American inflation on page 217.

Pause for reflection…

• Why did Keynes ideas not work as well as he may have hoped?

• What would you suppose was the major mistake on part of governments when implementing Keynes’ theory? Why was this mistake made?

• This theory holds that control of a country’s money supply is the best means to encourage economic growth and limit unemployment and inflation.

• Essentially, it reflected a return to the principles of liberalism through the application of classical liberal laissez-faire policies.

• Premiers Ralph Klein (Alberta), Mike Harris (Ontario), and Prime Minister Stephen Harper attempted to undo interventionist policies of previous governments.

Freidman and Monetarism• Milton Friedman is a key economic

thinker associated with neo-Conservatism which is also known as classical economics.

• His ideas are more closely linked with classical liberalism; thus his ideas are opposed to modern liberalism

• He is against the welfare state (social safety nets via government intervention) as it requires large government and excessive spending which leads to debt

• He is for fiscal responsibility and balanced budgets

• His economic theory/practice is called MONETARISM which is also known as SUPPLY-SIDE ECONOMICS

Belief Regarding Inflation:Inflation is the result of an

excess of money produced by the central banks.

• Fredrick Hayek was critical of collectivist thinking since before the Second World War, but the prevalence of Keyneisan Economic thought made Hayek’s ideas unpopular. His ideas gained popularity in the 1960s and 1970s.

• He believed that in order for a collectivist society to function, the government must have a high level of control over society.

• Eventually, this would threaten the liberty of the individual as the government gained control over all aspects of a citizen’s life.

• It is impossible for central planners to have sufficient information to make wise and ration decisions – cannot predict demand for products/service.

• Therefore, like Freidman, Hayek believed that the price system (free market) was the only way to balance supply and demand in the economy while maintaining individual liberty.

Hayek and Monetarism

• Decrease government intervention and spending in the economy

• Downsize the public sector by privatizing and deregulating government owned business and services/programs

• Decrease taxes and lower interest rates to get businesses to increase supply

• Control the amount of money in supply• Keep some unemployment to keep wages low –

as this helps business to grow (can reinvest profits)

• Keep government small (costs less money then to run a government)

Reaganomics• Ronald Regan became president of

the USA in 1981; during this time the US was still dealing with an economic crisis.

• While Nixon’s administration had tried to combat stagflation by setting wage and price controls, Reagan wanted less government involvement and a more individualist approach to economics.

• This known as supply-side economics or the “trickle down theory” – lowering taxes, especially among the wealthy will result in greater investment in the economy, thus resulting in greater growth.

• Increased investment and government defense spending will “trickle down” through the economy to the working class.

In Times Of Recession…

• Reduce corporate taxes– Creates more profit– Acts as incentive to enter

business• Reduce public income tax

– Increases public’s incentive to work

– Provides more money to spend

– Increased production creates demand

• Supply-siders insist that increased demand for goods and services must come from the private sector, not from government spending.

• The unrestricted market will eventually bring inflation under control

In Times of Inflation…

Reaganomics in ActionReaganomics

Following 1981 the Reagan administration put in action the following policies…

• Tax cuts primarily for corporations and the wealthy• Cut income tax 25%

• Government spending cuts in social services• Welfare subsidies, Medicaid, food stamps

• A stable money supply

• Deregulation of the economy• Reduced environmental, health, & safety regulations

• Aim to balance the budget.See the chart of government spending on pg 221

Thatcherism in ActionThatcherism• Following 1979 the

Thatcher government in Britain put in action the following policies…– Wide scale privatization– Emphasis on individual

initiative– Reduced the power of labor

unions (pg 221)– Reduced income and

corporate taxes

British prime minister Margaret Thatcher:

Influenced by monetarism and tried to reduce the government’s role in the economy through the application of

classical economic principles.

Reaganomics/Thatcherism: A Balance Sheet

Arguments in Favor

• A reduction in unemployment

• A reduction in inflation

• An increase in production

• A world wide move towards private enterprise

Arguments Against

• Growing national debt

• Growing inequalities in income levels

• A boom and bust cycle

• The decline of the middle class.

Blair’s Third Way• Tony Blair ran for office in 1997 on a platform called

the “Third Way”• It was the adoption of some Thatcherite and free-

market policies, while maintaining some social programs

• It was a compromise between Keynesian economics and monetarism - an attempt at balancing individualistic values of monetarism with collectivist values of social justice.

• In practice, resulted in increased public spending on health care and education and introduced a minimum wage.

• At the same time, introduced tuition fees for post-secondary education.