Recent political events concerning the international economic downturn have revived the discussion of Keynesian economic theory due to the apparent failure of free market neo-liberalism. On 26 September, 2008, French President Nicolas Sarkozy remarked that we must rethink the financial system from scratch, as at Bretton Woods [Parker, Barber, Dombey, 2008] while this sentiment was echoed by British Prime Minister Gordon Brown on 2 April, 2009, at the G-20 Conference in London when he declared an end to the Washington Consensus previously directing global economic policy [Sparrow, Baldwin and Stewart, 2009]. As such, the history of twentieth-century economics requires elucidation in order to explore the faults with the neo-liberal model, and to comprehend the Keynesian model which preceded it during the postwar recovery. Its establishment as a consequence to the Great Depression (1929-32) in America, and as a product of the Bretton Woods Conference (1944), would see the Keynesian model implemented as the guiding framework for global reconstruction and wealth-building following the Second World War until its replacement in the 1970s by the neo-liberal Washington Consensus of John Williamson. This latter shift will be explained as a movement against the Keynesian consensus between government and business, and as a re-formulation and continuation of classical liberal (or neo-classical) economic theory.
The paper aims to consider the replacement of Keynesian by neo-liberal economic theory, and to establish whether or not the process was inevitable. In order to analyze this hypothesis, it will first establish the history of Keynesian economics through as a reaction to conditions which provided for the financial collapse of the Great Depression, and its implementation at Bretton Woods.
[...] Nonetheless, the Conference would implement Keynesian analysis and neoclassical economic theory to create the “neoclassical synthesis” which outlined the provisions for state-intervention and international oversight based on provisions for aggregate demand and employment equilibrium. The Golden Age? As mentioned above, Keynes' economic theory does not create or advocate provisions which would encourage full-employment within the economy. Nonetheless, classical economic models which existed prior to the war and to Bretton Woods still promoted this notion and it is possible that the desire for full-employment within the economy was joined with Keynesianism as a result of the neoclassical synthesis. [...]
[...] “Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Reponse Analysis,” The Economic Journal, 104(425), 813-827. Blinder, A. S. (2002). “Keynesian Economics,” The Concise Encyclopedia of Economics. Retrieved on 2009-
[...] It is argued that only the state, being sufficiently large and powerful enough to effect real change, could externally provide for the re-vitalization of the market and thereby spur employment. Compensatory fiscal and monetary polices allowed the government to tweak the economy if a deficiency arose in aggregate demand; that is, activity could be “stimulated by public budgetary expenditures and incentives, including subsidies to the private sector and reduction of personal and corporate income taxes, which would have the effect of increasing disposable income” [Eaton, 2003]. [...]
[...] The essay will argue that the shift away from Keynes to the policies of the Washington Consensus was inevitable in light of the upsurge in the global trade market, and the shifting production capabilities from labor to capital as reflected by post-Fordism. The Keynesian Revolution John Maynard Keynes (1883-1946) advanced the macroeconomic theory that private sector decisions provoked inefficient outcomes which in turn necessitated policy intervention by the public sector in the form of monetary and fiscal policy action to stabilize output over the business cycle. [...]
[...] Considering that the IMF would undergo a fundamental transition from guarantor and regulator of fixed currency rates to an organization advocating for competitive speculation, it is clear that the Washington Consensus had overtaken the Keynesian policies advocated in the earlier half of the twentieth century. The “Stagflation crisis” of the 1970s not only discredited Keynesianism but enacted end of the decoupling between development economics and mainstream economics that had been gathering steam for several decades” [Naim, 2000]. Developing economies were forced to abandon prevalent thought which saw unfettered foreign access to their markets as detrimental to growth, or abandon foreign investment altogether. [...]
using our reader.