Download ECON 1100 – Global Economics (Fall 2013) “Europe`s Mixed

ECON 1100 – Global Economics (Fall 2013)
“Europe’s Mixed Economy”
Relevant Readings from the Required Textbooks:
 Commanding Heights – Chapter 1, Thirty Glorious Years: Europe’s Mixed Economy
 Economics – Chapter 13, Modern Capitalism Emerges in Europe
Definitions and Concepts:
 Over the course of the 20th Century, the role of government in the economy and the
economic systems which dominated changed dramatically worldwide. In most
developed countries there was: very little government at the start of the century; an
increasing role for government from about 1930 to the mid 1970’s; and a decline in
the role of government from the mid 1970’s onward.
 Three broad sources of “mixed economy consensus” after WWII:
i. World War II devastated Europe – the war caused destruction, misery, and
disruption over the entire continent. General consensus that government needed
to help
ii. Right before World War II the world experienced the Great Depression
iii. Prestige and Respect for Soviet System – the Soviet “5 year plans for industry,”
“command-and-control economy,” and “claims of full employment” seemed to
argue that socialism was the answer to controlling the economy (limitations of
central planning were still decades away from being evident)
 Full Employment – a situation in which every person in the labor force who wants to
work is able to find a job (i.e., the unemployment rate is “0%”)
 Commanding Heights – the “most important” or “strategic elements” of an
economy, consisting of the industries which provide goods/services that are essential
for other industries to operate (e.g., transportation, energy, financial markets, etc.).
 Welfare State – a system in which the government assumes the responsibility of
improving the welfare of its citizens, particularly with regards to health care,
education, employment, and social security.
 Great Britain, post World War II: Clement Attlee of the Labor Party was elected
Prime Minister of the United Kingdom in 1945 in a Landslide over Winston Churchill
of the Conservative Party, right before the end of WWII. Labor government that took
control after WWII sought to “make government into the protector and partner of the
people” and to “take on responsibility for the well-being of its citizens.”
 Fabians – British Socialist who sought to replace the “scramble for private gain”
with “collective welfare.” Fabians sought to implement socialism by peaceful
means within the existing political system (i.e., “voting”), not by way of
“revolution.” => greatly influenced the political philosophy and platforms of the
British Labour Party throughout the 20th Century


Beveridge Report – a report written by William Henry Beveridge that proposed a
series of social programs to “slay the five giants” of: Want, Disease, Ignorance,
Squalor, and Idleness (i.e., unemployment).
- Following Beveridge Report recommendations, the British Labor government
established a “welfare state” by: providing “free” medical care; creating new
pension systems; promoting better education and housing; and seeking “full
employment.”
 Nationalization – the acquisition of ownership and control of a privately owned
enterprise by the national government, either with or without compensation to the
original owners.
- British Labor Government under Attlee committed to nationalizing the
commanding heights of the economy => coal, iron and steel, railroads,
international telecommunications, utilities were all nationalized (about 20% of
Britain’s workforce ended up being employed in nationalized enterprises).
 Policies of the Labor Party appeared to work – unemployment, which was well
over 12% throughout the 1930’s, was as low as 1.3% in the late 1940’s.
France, post World War II: policies similar to those enacted in Great Britain were
put in place in France during this same time.
 Under the leadership of Charles de Gaulle (President of France from 1944 to
1946):
- Key sectors of the French economy were nationalized (The “Nationalization
Acts of 1945 and 1946” gave the French government control of: banking,
electricity, gas, coal, and other industries.
- Increased social welfare programs were put in place
- France began to rely upon Indicative Planning
 What emerged in France was an economy built upon “three distinct sectors”
- Private Sector: resources owned and operated by individuals
- Controlled Sector: resources owned by individuals, but the use of which was
heavily guided by the state
- Nationalized Sector: resources owned and directly operated by the national
government
 Indicative Planning in France – in the years following World War II, the French
government began to take an active in economic planning
- General Commission of Planning established in 1946, headed by Jean
Monnet
- Monnet Plan – set targets and priorities for investment in order to modernize
key sectors of the economy (e.g., coal, electricity, steel, railways, and
agriculture)
- Planification – efforts by French government to focus, prioritize, and guide
the actions of private business. Planifictaion, the French notion of Indicative
Planning, was intended as a middle ground between free markets and
Socialism.
- Jean Monnet created a credible model for the role of government and planning
in a modern market economy, helping create a consensus for the “mixed
economy” in France and throughout Europe.
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Germany, post World War II: conditions made it appear as if Germany was
destined to go down the same path as Great Britain and France and become a
Socialist country => leaders of the Social Democrat party were committed to
replacing capitalism with nationalization and central planning, much in line with the
policies of the British Labor Party
 Lack of food in Germany was part of a “global food crisis” (European wheat
production in 1947 was half of its 1938 level)
- U.S. was providing a great deal of food relief to Germany
- January 1948: Johannes Semler (German Director of Economic
Administration in the American/British Occupation Zones) noted in a speech
that much U.S. aid was not wheat, but rather corn, which he sarcastically
pointed out was what Germans fed to chickens => the word he used translated
as “chicken feed”
- Semler was fired and replaced by Ludwig Erhard
 Ludwig Erhard (who became the German Director of Economic Administration in
the American/British Occupation Zones in 1948) belonged to a group of free
market economists called the “Ordoliberals” – their vision for Germany was one
of a “German Social Market Economy.”
 “German Social Market Economy” – economic system which relied primarily
upon free market institutions, but with a significant “social safety net” (subsidies
and transfer payments to take care of the disadvantaged members of society).
Shifts in the levels of trade barriers and international trade during 20th century
 In the decades following World War II there was a dramatic reduction in trade
barriers and a subsequent increase in international trade (both globally and
particularly in Europe)
GATT (General Agreement on Tariffs and Trade – developed at the United
Nations Conference on Trade and Employment, Havana, Cuba, 1947)
 Initial agreement was signed by 23 countries, including: Australia, Brazil,
Canada, China, France, India, Netherland, Norway, South Africa, United
Kingdom, and United States
 Provided mechanisms for negotiating multilateral reductions in tariffs
 Became one of the most important propellants of postwar economic growth and
would help create a “global economy” that transcended national borders
Tariff – a tax placed on goods imported from abroad. Tariffs raise the price of
imported goods and therefore discourage trade.
Treaty of Rome (1957) – established a “Common Market” – an unprecedented
joining of diverse economies, built upon: the mixed economy consensus, the drive to
deal with issues related to the reconstruction of Germany, and the threat of the Soviet
Bloc.
European Central Bank – the central bank of the European Union, which
administers monetary policy for the 17 nations which directly use the Euro as their
sole currency
 bank created in 1998; circulation and official use of Euro began in 2002
 economies of Europe further integrated and drawn together by this institutional
change => in many respects, Europe is now a “single economy”

Period following WWII was one of considerable economic growth in both the U.S.
and war-devastated Europe.
 The “mixed economies” of Europe delivered standards of living that could not
have been anticipated or imagined a generation before.
 Countries throughout Europe enjoyed brisk economic growth, low levels of
unemployment, and low levels of inflation from the mid 1950’s through the mid
1970’s.
 Period known as the “Thirty Glorious Years” in France and the “Economic
Miracle” in Germany.
 This solid economic performance reinforced the notion that planning and an
active role of government was the route to economic prosperity. The limitations
of central planning (particularly “lack of incentives”) were still decades away
from being evident
Multiple Choice Questions:
1.
The system of Indicative Planning implemented in ______________ following
World War II became known as “Planification.”
A.
Italy
B.
Germany
C.
Great Britain
D.
France
2.
In most industrialized countries, the role of government in the economy ________
during the first part of the twentieth century and _________ during the last part of
the twentieth century.
A.
increased; then continued to increase.
B.
decreased; then continued to decrease.
C.
increased; then decreased.
D.
decreased; then increased.
3.
Starting in January 1929, the volume of global international trade
A.
increased for 144 straight months.
B.
remained constant for 24 straight months.
C.
decreased for 18 straight months.
D.
decreased for 53 straight months.
4.
Which of the following industries would NOT be considered part of the
“Commanding Heights” of an economy?
A.
Electricity generation.
B.
Music and Entertainment.
C.
Banking and Finance.
D.
None of the above answers is correct (since each of the choices would be
considered part of the “Commanding Heights” of an economy).
5.
The circulation and official use of the Euro as currency began in _____.
A.
1892
B.
1947
C.
1957
D.
2002
6.
During the first decade of the 21st Century, unemployment rates in most Western
European countries were ___________________ the unemployment rate in the
United States.
A.
higher than
B.
lower than
C.
virtually equal to
D.
None of the above answers are correct (since the unemployment rate is a
macroeconomic measure that is unique to the United States).
7.
From the mid 1950’s through the mid 1970’s, many countries throughout Europe
(such as France and Germany) experienced relatively
A.
low levels of unemployment.
B.
high rates of inflation.
C.
high, sustained rates of economic growth.
D.
More than one (perhaps all) of the above answers is correct.
8.
_________________ refers to a system in which the government assumes the
responsibility of improving the well-being of its citizens, particularly with respect
to healthcare, education, employment, and social security.
A.
The Economic Miracle
B.
Planification
C.
Nationalization
D.
The Welfare State
9.
When making general observations on the level of barriers to trade around the
world, it was noted that before World War I there were __________ trade barriers
whereas by the end of the 1930s there were __________ trade barriers.
A.
very high; even higher.
B.
relatively low; even lower.
C.
relatively low; relatively high.
D.
relatively high; relatively low.
10.
Which of the following countries operated under a system of “Command and
Control Planning” before World War II?
A.
Germany.
B.
France.
C.
The Soviet Union.
D.
More than one (perhaps all) of the above answers is correct.
11.
The “Fabian Society” in the U.K.
A.
implemented policies which resulted in the British economy entering a
severe economic downturn from 1946 through 1967, during which time
over 25% of the workforce was typically unemployed.
B.
wanted to implement socialism in Britain by way of revolution following
World War I.
C.
was founded in 1953, in an attempt to stop the rapid expansion of
government in the British economy.
D.
greatly influenced the political philosophy and platforms of the British
Labor Party during the 20th Century.
12.
The European Central Bank was created in _______.
A.
1914
B.
1945
C.
1998
D.
2009
13.
_________________ refers to a situation in which every member of the labor
force is able to find a job.
A.
A Budget Surplus
B.
Full Employment
C.
Economic Prosperity
D.
Monetarism
14.
At the end of World War II,
A.
tens of millions of people were starving throughout Europe, as part of a
global food crisis.
B.
the industrial capacity of all European Countries was at an all time high.
C.
leaders in most countries throughout Europe wanted to copy the Germans
and establish something similar to the “German Social Market Economy.”
D.
More than one (perhaps all) of the above answers is correct.
15.
A “mixed economy consensus” emerged throughout much of Europe following
World War II as a result of the
A.
belief that the Soviet System of “Command and Control Planning” was an
abject failure.
B.
fact that the war caused destruction and misery in numerous countries
throughout the continent, prompting many to feel that government was
needed to assist in the ultimate reconstruction.
C.
tremendous economic prosperity that all free market economies
experienced in Europe during the 1930’s.
D.
More than one (perhaps all) of the above answers is correct.
16.
Monetary policy for the 17 nations which use the Euro as their official currency is
set by the
A.
Federal Reserve.
B.
European Central Bank.
C.
Bank of England.
D.
General Commission on Planning.
17.
The __________________ gave the French government control of the banking,
electricity, gas, and coal industries within France.
A.
Beveridge Report
B.
General Agreement on Tariffs and Trade
C.
Nationalization Acts of 1945 and 1947
D.
Red Army
18.
____________________ relied primarily upon free market institutions, but with a
significant “social safety net.”
A.
Soviet Five Year Plans for Industry
B.
The Nationalization of British Industry
C.
Keynesianism
D.
The German Social Market Economy
19.
After World War II, a consensus emerged in France for a “new economy”
consisting of:
A.
only a “Nationalized Sector” (in which resources are directly owned and
directly operated by the national government).
B.
only a “Controlled Sector” (in which resources are owned by individuals,
but the use of resources is dictated by the state).
C.
only a “Private Sector” (in which resources are owned and operated by
individuals).
D.
a “Private Sector” (in which resources are owned and operated by
individuals), a “Nationalized Sector” (in which resources are directly
owned and directly operated by the national government), and a
“Controlled Sector” (in which resources are owned by individuals, but the
use of resources is dictated by the state).
20.
_________________ was Prime Minister of Great Britain when the country
Nationalized the Commanding Heights of its economy after World War II.
A.
Clement Attlee
B.
Charles de Gaulle
C.
Winston Churchill
D.
Margaret Thatcher
21.
From the late 1920s to the mid 1930s, the volume of manufactured imports
____________ in Germany.
A.
increased by roughly 25%
B.
remained relatively constant
C.
decreased by roughly 10%
D.
decreased by roughly 33%
22.
The “General Commission of Planning” that was established by the French
government in 1946 was initially headed by
A.
Jean Monnnet
B.
William Beveridge
C.
John Maynard Keynes
D.
Johannes Semler
23.
The Beveridge Report
A.
established the Red Army as the rulers of Great Britain in 1946.
B.
outlined a series of social programs to “slay the five giants” of want,
disease, ignorance, squalor, and idleness, which were plaguing British
society at the end of World War II.
C.
clearly argued why free market systems will always outperform systems of
“Command and Control Planning.”
D.
gave the French government ownership and control of the banking,
electricity, gas, and coal industries in the country in the mid-1940’s.
24.
Johannes Semler was replaced by Ludwig Erhard as the German Director of
Economic Administration in the American/British Occupation Zone after
referring to U.S. food aid to Germany as
A.
ambrosia.
B.
gruel.
C.
chicken feed.
D.
dog food.
25.
The “Treaty of Rome”
A.
was initially signed in 1947 by 23 countries, geographically from all
reaches of the globe.
B.
established a “common market” in Europe and was the precursor to the
European Union.
C.
was the primary cause of World War I.
D.
More than one (perhaps all) of the above answers is correct.
26.
__________________ was President of France from 1944 to 1946, during which
time key sectors of the economy were Nationalized, the size and scope of social
welfare programs were increased, and the country began to rely upon indicative
planning.
A.
Nicolas Sarkozy
B.
Charles de Gaulle
C.
Friedrich von Hayek
D.
François Mitterrand
27.
Sven lives in a country with economic policies that can be described as a “welfare
state.” This implies that
A.
the poverty rate in Sven’s country is 0% (i.e., there are no poor people in
the country).
B.
the average standard of living (measured by per capita income) in Sven’s
country is significantly higher than it would otherwise be.
C.
the unemployment rate in Sven’s country is 0%.
D.
the government in Sven’s country assumes the ultimate responsibility of
improving the welfare of its citizens.
Answers to Multiple Choice Questions:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
D
C
D
B
D
A
D
D
C
C
D
C
B
A
B
B
C
D
D
A
D
A
B
C
B
B
D