The economy of state intervention

World War II and the two or three decades thereafter were imbued with the idea that economic systems can and should be governed by public institutions.

State intervention was first justified by the problems arising from the war economy and later by the need to support employment and the recovery process, and avoid the chaos of the 1930s. Its foundation can be traced back to the theories suggested by John Maynard Keynes and his followers in the 1920s and 1930s (see, in particular, Keynes, 1936) and to the Beveridge Report (see Beveridge, 1942).

Econometric techniques introduced in the previous decade and, to some extent, the practice and apparent success of planning in the Soviet Union also contributed to this phase, justifying an active engagement of the state in the economy, in maintaining full employment and creating government or international institutions.

Public commitment addressed not only full employment and greater social equity but also growth and development. In this respect, the models developed first by Harrod and Domar, and then by Solow and Swan, provided guidance (see Harrod, 1939; Domar, 1946; Solow, 1956; Swan, 1956).

Above all, between the end of the 1930s and the beginning of the 1940s, the complex problems of governance posed by a war economy were addressed in the Anglo-Saxon countries in a more structured way than during World War I, by exploiting the Keynesian conceptual apparatus.

Public spending for military purposes obviously ensured achievement of full employment. As already experienced during World War I, however, prolonged policies of high support for demand stimulated by government spending, while directing the economy toward full employment, could raise problems of a different nature.

The first such problem was inflation and monetary instability. Indeed, the objective of monetary stability was never neglected, at least in the Anglo-Saxon experience, and required adoption of an appropriate set of measures for rationing consumption, as well as other instruments, as Keynes himself suggested (Keynes, 1940). This set of policies was known as the “circuit of capital,” reminiscent of the Marxian idea borrowed by Keynes for a monetary economy (see Dillard, 1984; Aoki, 2001).

An additional problem that arose naturally was that of the public debt accumulated to finance public spending for military purposes.