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The Return to the Market
 The global economy on the eve of World War I
 The catastrophe of World War I for Europe
 The Great Depression
 The subsequent turn from the market
 The return to the market after economic stagnation
in the 1970s
The power of ideas
The value of studying economic history:
We cannot understand the present, nor plan for the
future, without understanding the past; and history is
often driven by ideas and underlying social forces, not
just by events.
Economies throughout the world have been moving
from a model in which there was extensive state
intervention to a model of free markets: “In its
entirety, the struggle constitutes one of the great
defining dramas of the 20th century.”
Yergin, D. & Stanislaw, J. (2002). The Commanding Heights. New York: Touchstone. (p. xi)
Some questions about the turn to the market
1. Is it irreversible?
2. A natural path of development?
3. What will the consequences be?
4. What is the role of the state in a market economy?
The global economy on the eve of world war i
The causes of world war i
The consequences of world war i
Destabilization of the global economic & financial system:
The great depression and failure of
government economic policy
Extent of the Depression
The great depression and failure of
government economic policy
Causes of the Depression
The great depression and failure of
government economic policy
Government responses to the Depression: The Wrong
The turn from the market and the new
economic models
The problem with the market: It wasn’t delivering the goods
The turn from the market and the new
economic models
The command economies: Communism and Fascism
The theoretical foundation for the retreat from
reliance on market forces in the west
John Maynard Keynes
The General Theory of Employment, Interest, and Money (1936)
Fiscal policy would enable wise
managers to
the economy without resorting to actual controls.
Economic growth & prosperity resulting from
government macroeconomic policy
The end of a very good idea
What Britain’s economy looked like in the 1970s
- high inflation, and . . .
- high unemployment
- nationalized industries losing money
- high taxes to fund welfare state
- labor strife
- negative balance of payments and declining
value of the pound
And in the U.S. . . .
The grim realities of stagflation in the 1970s
The return to the market
The economic policies of Ronald Reagan and Margaret Thatcher:
Another very good idea: The theoretical foundation
for the return to the Market
Friedrich van Hayek and the issue of economic
Milton Friedman, the Chicago School, and
monetary policy
Implications for government’s role in the economy
The issue of economic information
What is the problem we wish to solve when we try to construct a rational economic
order? On certain familiar assumptions the answer is simple enough. If we possess all the
relevant information, and if we can start out from a given system of preferences and if we
command complete knowledge of the available means, the problem which remains purely
one of logic . . . This, however, is emphatically not the economic problem which society
The peculiar character of the problem of a rational economic order is determined
precisely by the fact that the knowledge of the circumstances of which we must make use
never exists in concentrated or integrated form, but solely as the dispersed bits of
incomplete and frequently contradictory knowledge which all the separate individuals
The economic problem of society is thus . . . How to secure the best use of resources
known to any of the members of society for ends whose relative importance only these
individuals know. Or, to put it briefly, it is the problem of utilization of knowledge not
given to anyone in its totality.
Friedrich von Hayek (1945), The Use of Knowledge in Society. American Economic
Review 35(4): 519-530 cited in H.E. Daly & J.B. Cobb, 1994, For the Common Good.
Boston: Beacon Press
Milton Friedman, the Chicago School, and
monetary policy
Monetarism and the role of government in macroeconomic policy
Milton Friedman, the Chicago School, and
monetary policy
Monetarism and the role of government in macroeconomic policy
The Chicago economists believed, in practice, in a very small number of theorems about the
way decision makers allocated resources and the ways these allocations led to prices. They
trusted in markets and the effectiveness of competition. Left to their own devices, markets
produced the best outcomes. Prices were the best allocators of resources. Any intervention
to change what markets, left alone, would achieve was likely to be counterproductive.
At the same time, the government also got busy trying to displace Keynesianism with
monetarism. Instead of intervening with fiscal policy, the Tory government believed that its
main economic job was to ensure a steady growth in the money supply that would be
commensurate with economic growth.
(The Commanding Heights, p.128)
Some Critical tests of the free market
 Will the market deliver the goods?
 Will the results be seen as fair and equitable?
 What will happen to national identity in an international
 Can the environment sustain it?