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Preface
- Robert Morton
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- Book:
- A Life of Sir Harry Parkes
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- Amsterdam University Press
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- 04 May 2022
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- 29 October 2020, pp vii-x
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Summary
MY GREAT-GRANDFATHER, SIR Harry Parkes, died in 1885 – long before any members of my immediate family had the chance to speak with him. More important perhaps, I never met my grandparents or anyone else of the generation of Sir Harry's children in person. So the house was never full of anecdotes or the exploits of his life in the nineteenth century of the Far East as it opened up to engagement with Europe; his way of working, his understanding of the strategies he needed to follow to further British interests; what those interests were and why; the quality of life at that time; and his relationships, private as well as professional, with those with whom he had to work at this high, and possibly controversial point in the colonial era.
These are all important questions and worth pursuing for their insights into the workings and influence of the colonial system and its principle agents. However, the existing literature tends to treat them in piecemeal fashion. Either one has to rely on ‘official’ accounts or histories of the period that offer different interpretations of imperialist thinking and events. Examples in Harry Parkes's case would be Lane-Poole & Dickins or Loch. The trouble with that type of analysis is that it is always subject to a prospective bias or agenda that the author may have. In particular, the evaluation may change, and often does, with popular perceptions of what may be justifiable or acceptable in a more modern era – and this includes cases where the (perceived) relative importance of the costs vs. benefits of an imperialist system for different sections of the population shift.
On the other hand, an evaluation of a regime's performance and outcomes must depend to a significant extent on the individuals responsible for its implementation and how they interact with the political and economic environment within which they are working. For that sort of information and an evaluation, we are dependent on personal papers, personal observations or more anecdotal evidence from those involved in the process. The problem here is those papers or observations are often not available, or are only partially available, because they have been destroyed or become lost over time.
14 - Taking stock: the end of the ride or the beginning of a new one?
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 05 June 2016
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- 31 May 2016, pp 284-296
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Summary
A century of theories and policies
Economic theory and economic policy are characterized by two factors: ideas and techniques. New ideas are not necessarily more powerful than older ones. By contrast, new techniques usually are. Our book has briefly followed the evolution of both over the past century.
An economic policy stance changes as a consequence of a mix of different factors such as changes in the economy and the emergence of new problems, changes in the political orientations of society, and the evolution of the foundations of economic theory. How these factors combine, possibly in very different ways over time, cannot be only the object of economic analysis. It also belongs to the realm of history.
In contrast to physical systems, economic systems evolve and change their rules. Different ideas can then be more appropriate under different circumstances. Economic policies implemented in each historical period respond to the specific needs or “emergencies” of that period but they draw inspiration from the stock of economic ideas and empirical observations that have accumulated over time.
Often, in the unexplored waters of economic changes, economic ideas, whether in policy or theory, suffer from inertia and lags in their implementation and development. This can lead to undesirable outcomes. In addition, economic policies reflect the sentiments, the preferences, and perhaps deeper goals, of society and its representatives, which are also mutable across time.
In a number of cases, which we have explored in this book, old ideas and policy suggestions come back and are revived and are then re-applied in modified forms. A review of the policies implemented in the last 70 years or so – and the theories that supported them – is therefore useful not so much as a historical reconstruction of their evolution but more as a way of assembling and understanding how the toolkit of an economist can be useful for current theoretical as well as applied analytic purposes.
The aim of the book has been to look at the evolution of macroeconomic policies and economic thought in the light of the development of the world economy. We proceeded, in each case, by connecting the development of economic needs and goals, policymakers’ choices, and economic ideas, stressing links and complementarities.
Preface
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 05 June 2016
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- 31 May 2016, pp xiii-xiii
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Summary
Our understanding of the macroeconomic policy debates and institutions designed to achieve desirable economic, political, or social goals has changed a great deal over time, oscillating between state interventions and a free-market approach. This book focuses on the tension between these two positions, a tension that is driven by conflicts between the desired goals of economic policy and what is feasible.
The book gives a novel and rather unconventional account of this evolution and where it is leading. It presents the policies and underlying theories in an informal way, so that the reader can easily grasp the main story line, the implications, and reasoning behind the different policy designs.
Apart from Chapter 1, which is introductory, the book is organized in two parts. The first focuses on the developments of economic theories and policies and includes Chapters 2–6. The second part – Chapters 7–13 – concentrates on the design of domestic and international institutions and economic governance. A final chapter concludes and traces some possible scenarios on the future evolution of economic policies.
4 - The pro-market counterattack: powerless economic policies
- from Part I - The emergence of alternative paradigms
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 48-73
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Summary
The emergence of the stagflation age
The 1960s ended with a worldwide escalation of social conflicts, aimed to fight the dominant elites in both capitalist and Soviet-bloc countries. Mass movements grew in the United States and in most European countries. The baby boom and, in Europe, the end of the golden age associated with postwar recovery fueled social tensions supported by the alliance of students, blue-collar workers, and other social categories. In the famous May 1968 protests, students lined up with wildcat strikes of up to ten million workers that froze economic and political activity in France. Eastern Europe also experienced widespread protests that escalated, particularly in the Prague Spring in Czechoslovakia, and ended up with the Soviet invasion. The Great Proletarian Cultural Revolution characterized the Chinese scene between 1966 and 1976.
The protests of 1968 can be interpreted as a reaction against state centralization, which itself was the social answer to the authoritative regimes of the interwar period. After the war, developed societies experienced a need for collective freedom which led to the creation of large welfare states, Keynesian policies, the advent of mass culture through the media development, education policies and, in general, a large public intervention in the citizens’ lives.
In the 1970s, the developed societies began to face a deep crisis. New problems and new needs emerged. On the one hand, the relationship between economic development and the domestic nature of postwar capitalism entered into a crisis due to the increase in public spending and the limits to the system of capitalist accumulation. On the other hand, people from the newly educated masses began to search for individual freedoms refusing and contrasting the ideas of a homogenous centralized framework.
The complex society, forged to implement an integral and universal social protection system “from cradle to grave,” extended the space of individual autonomy, raising the level of education and the improvement of living conditions. However, it also strengthened the rules and the invasive tendency of the state apparatus. The extended welfare state was built not only to favor certain groups but also because it was needed for a well-functioning society (Foucault, 2008).
The need for individual freedom found its economic expression in new ideas that emphasized the market virtue.
List of tables
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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11 - Fixed exchange rates: the age of tempered liberalism
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 231-247
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Summary
Different systems of international governance
International governance is concerned with setting rules governing the transactions of goods and services, capital movements, and investment incomes across borders. It also refers to the payment systems that are designed to facilitate and regulate these transactions. Those rules are not set in a vacuum; there are social and political forces behind their acceptance, which determine their size and operations.
In other words, rules derive from economic, social, and political determinants acting within and between each country, and these determinants may change through time as needs and expectations evolve. Of particular relevance here, we may assume certain countries will acquire the status of “leader” from time to time, and will play a crucial role in the choice and management of international institutions
The different systems of governance of movements of goods can be summarized in the tension between the adoption of free trade and markets regulated by tariff and/or non-tariff barriers. Trade barriers raise the price of imported goods in order to reduce imports of goods produced elsewhere and safeguard domestic producers against foreign competition, but typically end up by transferring a good part of the cost to domestic consumers. Similarly, the rules presiding over capital movements are determined by a tension between complete freedom and some kind of regulation that can be different for different kinds of movements, usually more stringent for short-term ones, and are designed to confer safety and stability.
Given the general purposes of this book, we are more interested in the international system of payments and the different monetary regimes that can be adapted to govern the operations of one country in relation to the others. These rules define the relationship of the home to foreign currencies in terms of relative value, circulation, and convertibility. They add to, and may be independent of, the rules that define the internal monetary unit – that is, of the instruments used as domestic legal tender.
A monetary regime is required to ensure stability in terms of transfers of purchasing power, to eliminate imbalances and settle conflicting interests of the different countries, as well as to complement rules governing other aspects of international relationships.
Frontmatter
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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2 - The dawn of the Keynesian age
- from Part I - The emergence of alternative paradigms
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 15-30
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Summary
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.
10 - Conflicts and cooperation in the labor markets
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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Acknowledgments
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp xiv-xiv
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Index
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 320-339
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3 - The Phillips curve menu
- from Part I - The emergence of alternative paradigms
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 31-47
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Summary
The re-emerging issue of monetary stability
In the United States, the United Kingdom, and most developed countries, economic policy of the 1960s was inspired by the principles of the Keynesian neoclassical synthesis. James Tobin, Paul Samuelson, and others among its major representatives were influential advisors of Presidents John F. Kennedy and Lyndon Johnson.
The 1960s experience was a crucial turning point for the evolution of postwar macroeconomic thought. On the one hand, it entrenched the neo-classical synthesis as the then new orthodoxy; on the other hand, it triggered consequences that led to its final abandonment. In fact, the 1960s ended with rising inflation which, in a few years, the oil shocks would greatly accelerate – leading to a radical reconsideration of the accepted Keynesian theory.
As shown by the war experience, policies that pursue full employment for a long period tend to cause inflation if they are not conducted in combination with other suitable policies. In the 1950s, most Western countries had come back to full employment and inflationary tensions began to emerge in the various markets, especially in the labor market.
In the 1950s, Phillips (1958), in observing data for the United Kingdom from 1861 to 1957, noticed a stable negative correlation between unemployment and the rate of change in wages. The relationship came to be called the Phillips curve (see Figure 3.1). As an empirical relationship, it was further confirmed when the rate of inflation replaced the rate of change of wages. This is entirely plausible because of the positive link between these two variables, which arises from the fact that prices must ultimately cover average costs (the full cost of production).
The Phillips relationship introduced some important innovations. The first of them was to force a focus on stability (or otherwise) in the relationship between the indicated variables. However, the most important innovation was that a stable relationship between a nominal variable (rate of change in wages) and a real one (unemployment rate) proved the existence of a hitherto neglected relationship between the monetary and the real sectors of the economy. Therefore, it contradicted the quantity theory of money but allowed the integration of inflation into the neoclassical synthesis. Obviously, the integration required developing a theoretical framework that could justify the use of the Phillips empirical relationship. This did not happen immediately.
Part I - The emergence of alternative paradigms
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 13-14
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6 - The Great Recession and beyond
- from Part I - The emergence of alternative paradigms
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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Summary
The financial crisis and the Great Recession
The US stock market experienced a spectacular growth between July 2006 and July 2007. In just one year, the Dow Jones increased by 30%; the value of US corporations rose from $11.5 trillion to $15 trillion. Yet the fundamentals increased at their normal rates; nominal GDP in the United States increased by only 5% ($650 billion).
What happened to the US economy in 2006? As pointed out by De Grauwe (2010), the answer is almost nothing, apart from a change in the “animal” spirits of investors, who somehow began to believe that the US economy had entered a new era characterized by a permanent growth path for an indefinite future. In fact, the US economy entered in to a speculative bubble instead that soon bust and led the United States and the entire world to the most dramatic recession since the 1930s.
Within a year, between 2007 and 2008, stock prices dropped by 30%. The economy experienced a sudden sharp reduction in the availability of credit from banks and other lenders (a credit crunch) and trade and industrial activity reduced dramatically. Millions of Americans lost their homes and jobs; many more saw their retirement and education investments dwindle in value. Soon the US crisis turned global, spreading to Europe and to the rest of the world. Almost 12 million workers had lost their jobs in the Organisation for Economic Co-operation and Development (OECD) countries up to mid 2014.
Bubbles (and crashes) are not a special feature of recent years. They are endemic in capitalist systems; bubbles have existed since capitalism started and usually result from uncertainty, herd behavior, positive feedback, or bandwagon effects (Kindleberger and Aliber, 2005; Reinhart and Rogoff, 2009). A bubble occurs when investors believe in increases in an asset price independently of its fundamentals; asset prices then increase because the surge of demand fuels expectations of further rises, which then become self-fulfilling. However, as soon as the misalignment in prices becomes clear and investors change their beliefs, buyers become sellers. The bubble explodes and prices fall dramatically. Investors lose money and often, as a consequence, market confidence evaporates in all sectors of the economy.
Although bubbles are not special, they are not “white noise.” Their explosion and consequences are strongly related to the institutions (in particular, to financial sector regulation).
Macroeconomic Paradigms and Economic Policy
- From the Great Depression to the Great Recession
- Nicola Acocella, Giovanni Di Bartolomeo, Andrew Hughes Hallett
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- 05 June 2016
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- 31 May 2016
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The recent financial crisis has demonstrated the dangers of ignoring the factors that led to previous crises, and the effectiveness of the policies designed to deal with them. Over time, these macroeconomic policies have evolved, oscillating between state intervention and a free-market approach. Following a story that runs from the pre-Great Depression era up until the Financial Crisis of 2007–11, this book reveals an intimate connection between new macroeconomic ideas and policies and the events in the real economy that inspired them. It does this in an accessible, easy-to-follow style, first by focusing on the developments of economic theories and policies, and then by concentrating on the design of domestic and international institutions and economic governance. Written by three leading experts on the history of economic policy, the book is ideal for graduates and undergraduates studying macroeconomics, monetary policy and the history of economic thought.
7 - Central banking
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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Summary
Governments, central banks, and money
At the beginning of the nineteenth century, David Ricardo expressed his concerns about entrusting governments with the power to issue paper money. He argued that a government would almost certainly abuse this power and pointed out that central banks must be governed by individuals who should be “entirely independent” of the government, and who “should never, on any pretence, lend money to the Government, nor be in the slightest degree under its control or influence” (Ricardo, 1824). Ricardo anticipated two milestones of the modern theory of central banking: (1) the need to make central banks independent from government and (2) a general prohibition on central banks financing public expenditure.
The rationale of Ricardo's point of view was related to the general habit of kings to finance their Royal Expenditures by printing money without accounting for the consequences of this source of revenue.
The perverse linkage between political power and the absolute sovereignty over printing money eased with the emergence of an independent nominal anchor in the Gold Standard. As a result, at the end of the nineteenth century, due to the massive liberalization of capital movements implied by this first wave of the globalization process, central banks reached a high degree of independence from the government.
After World War I, the Roaring Twenties, and the recovery from the restrictions of a wartime economy, the end of the globalization process imposed wage and price rigidities that contributed to an undermining of the gold standard system. The fall of globalization in the 1930s became the principal threat to financial stability and economic prosperity in a world that was now without well-defined international rules.
The consequent Great Depression led many governments to nationalize their central banks since, as monetary authorities, they had suffered a general loss of public trust. As institutions, they had shown themselves unable to combat the new phenomenon of a major global recession, and indeed had probably helped to make it worse (Foreman–Peck et al., 1992).
The United States had also begun a debate about nationalizing the Fed at this time but ended up with a compromise that strongly reduced the central bank's independence from the government.
13 - A fragile European construction: the perils of incomplete coordination
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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- Macroeconomic Paradigms and Economic Policy
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- 31 May 2016, pp 264-283
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Summary
The steps of European integration
The foundations of European integration can be traced from the discussions immediately after World War II (Baldwin and Wyplosz, 2006). The central question was “How can Europe avoid another war?” and the natural answer was dependent on the identification of the roots of the war.
At the time, three main interpretations were proposed: the Germans were to blame as in 1914; the competition for market dominance induced by capitalism (Lenin's imperialism view); and the destructive nationalisms of the early 1900s. Different interpretations called for different solutions: a neutered Germany (Morgenthau Plan, 1944), adopting communism, or pursuing European (political) integration. The latter ultimately prevailed, but this was far from clear in the late 1940s.
The United States tried to promote integration among European countries to counter the emerging power of the Soviet Union at the beginning of the Cold War. Economic, military, and political calculations lay behind the US aid program for European countries (the Marshall Plan), which made aid conditional on effective cooperation among European governments and the gradual liberalization of trade and payments between the European economies (a reasonable stipulation given the rivalries of the 1930s).
The US attempt, however, received a feeble response from a Europe deeply divided after the war. A genuine European economic cooperation began only with the Schuman Declaration of 1950 and the construction of the European Coal and Steel Community (ECSC) in 1951.
This putative European Union was then strengthened and expanded by the Treaty of Rome of 1957, which established the European Common Market and the European Atomic Energy Community between Italy, France, Germany, Belgium, the Netherlands, and Luxembourg (the Six).
Political integration began from the economic sphere and remained focused around economic measures for a long time. The need to introduce Europe-wide policy coordination gradually and the limited scope of the initial approach to economic integration were prompted by the difficulty of proceeding with full political integration as the failure to create a European Political Community, inspired by De Gasperi in 1954, showed.
At the start, the European Common Market was not much more than a customs union, devoted to the lowering of internal duties, the setting of a single customs tariff for countries outside the Market (a common external tariff was adopted in 1968), and a set of specific common policies relating to agriculture, transport, and competition legislation.
1 - Introduction
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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Summary
Economic policy as policy action
This book has been designed to give a novel and rather unconventional account of the evolution and changes in macroeconomic stabilization policies and institutions in the world's economies since World War II. It is unconventional because it presents the analysis of the policies and underlying theories in an informal way, so that the reader can easily grasp the main story line, implications, and reasoning behind policies, eschewing formal solution techniques that can be found elsewhere.
The understanding of macroeconomic policy and institutions designed to achieve desirable economic, political, or social goals has greatly changed over time, oscillating between state intervention and a free-market approach. We focus on the tension between these two positions, which is driven by conflicts between the desired goals of economic policy and what is feasible or manageable according to our understanding of the economic system.
Macroeconomics and macroeconomic policies began with J. M. Keynes in the 1930s – although the terms appeared in scientific journals only later, in the 1940s. Before Keynes, the main typical state interventions involved the use of taxes (including tariffs), provision of essential public goods, and money regulation. In some cases, as with antitrust laws, it aimed only at avoiding the limits to competition introduced by firms with excess market power.
After Keynes, policy action started to include interventions of a more traditional macroeconomic type, targeted at aggregate variables such as employment, national income, inflation, and growth. The Great Depression that began in 1929 can be considered as a watershed in the evolution of state intervention in general, and particularly so from the standpoint of macroeconomic policy. The main issue of the 1930s was unemployment. Policies enacted just before and just after World War II targeted that problem directly. Further policies designed to deal with other macroeconomic problems followed in the postwar period: policies for balanced trade, investment flows, productivity, income distribution, inflation, exchange rate movements, and financial policy.The climax of Keynesian macroeconomic policy action was reached at the end of the 1970s. After the second oil crisis of 1979–1980, and to some extent after the first crisis in 1973–1974, the focus shifted from unemployment to inflation. Policies had then to react to the emergence of inflation on a scale that had never before been experienced collectively by developed economies.
9 - Further fiscal policy challenges
- from Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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Summary
Beyond stabilization policies
This chapter extends and complements the analysis of the previous two in a different sphere. Monetary and fiscal policy are not just a mechanical device to manage aggregate demand in specific circumstances, or a means to correct market failures, promote structural reform, or pursue some special interest. All of those things are important. But economic policy can be used strategically to model society in a form that we might prefer – an argument made very clear in the Mirrlees Review (Adam et al., 2010; Mirrlees et al., 2011).
We now focus on further aspects of policymaking considering its capacity to promote risk sharing over different regions and sectors of the economy as well as different ages of the population. We look at its ability to act as a shock absorber when imbalances appear elsewhere in the economy, for example in trade or the financial sector; its capacity to help us to face up to demographic change; and the possibility of using economic policies to address inequality and welfare provision.
The chapter is organized as follows. Section 9.2 introduces the issue of risk sharing and regional stabilization. Section 9.3 looks at the macroeconomic imbalances. Then, Section 9.4 focuses on demographic change and age-related spending. Finally, the last section discusses redistribution, inequality and welfare.
Fiscal federalism and regional stabilization
In a federal regime, some taxes and expenditures are assigned to regional governments and some to central government. This creates a central budget into which regions pay, or receive payments from, on an automatic basis – in each case at rates chosen by the central government.
There will also be separate budgets at the regional level since not all taxes/expenditures are centralized. Those taxes or expenditures will be charged or paid out at rates chosen by regional governments. There may be no grants or discretionary payments made from the center. However, adding an upper level of federalist transfers (creating “vertical imbalances”) to the regions is always possible and would increase efficiency since those transfers will enhance the system's ability to adapt to local conditions and create an ability to undertake long-run redistributions.
Long-term redistributions can also be created by choosing the federal tax and expenditure functions such that there is a net transfer to certain regions on average and, if the central budget is balanced, away from others.
Part II - Institutions and policies
- Nicola Acocella, Università degli Studi di Roma 'La Sapienza', Italy, Giovanni Di Bartolomeo, Università degli Studi di Roma 'La Sapienza', Italy, Andrew Hughes Hallett, University of St Andrews, Scotland
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