Unit 1: Historical and Contemporary
Overview of Globalization
Part 2: Between the World
Wars
The period between the two
world wars was punctuated by political and economic upheaval,
the rise of Stalin and the Soviet Union, the Spanish Civil
War, the emergence of European fascism, and the Great Depression.
The US’s Smoot-Hawley tariffs of 1930 were emblematic
of the changes in the world economy. European overproduction
in the agricultural sector (an after-effect of agricultural
build-up during the first world war) drove world grain and
corn prices down, and thus drastically depressed the value
of farm land in the US. The Smoot-Hawley tariffs drew up
agricultural import restrictions and provoked other industries
to seek relief from international competition. The US government
complied. By 1933, the US had the highest levels of tariff
protection it had ever had. These drew retaliatory measures
from all of the US’s trading partners. In general,
the world’s largest economies increasingly relied
on “beggar-thy-neighbor” policies which, like
Smoot-Hawley, benefited one country at the expense of others.
World trade collapsed. During this period, U.S. imports
from Europe declined from $1,334 million in 1929 to $390
million in 1932; U.S. exports to Europe fell from $2,341
million in 1929 to $784 million in 1932. World trade declined
by roughly 66% between 1929 and 1934.
Between the wars, suspicion grew about how well the market
could achieve just or efficient outcomes on its own. The
market economist who enunciated skepticism most clearly
was John Maynard Keynes, whose Treatise on Money was a flashpoint
for debate. Although the Treatise is fairly technical, covering
topics ranging from the theory of monetary fluctuations
to the diffusion of price levels, its basic premises are
pretty simple. Keynes argued, quite contrary to the traditional
liberal, “free-market” view, that money was
not neutral in economic transactions—it wasn’t
simply a veil for the real value of goods being traded.
This implied that prices did not always adjust immediately
to supply or demand shocks so as to equilibrate the market
at full employment—especially in an international
context: since prices were “sticky,” we might
expect there to be perhaps prolonged periods of unemployment
of labor or capital. This view, rearticulated in The General
Theory of Employment, Interest and Money, was widely accepted
as the basis for national economic policy especially during
and after the Great Depression, when the inability of the
markets to clear at full employment was on glaringly on
display in the US and the Europe.
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 ***Tip
Box: According to classical economic theory,
when an economy falls out of full employment equilibrium
due to an unexpected downturn in demand, as was the
case with the 1929 stock market crash, for example,
prices (wages) will quickly fall until demand (employment)
is restored. This prevailing view of economic order
was called into question by Keynes when the economy
failed to recover from that crash. Keynes did not
hold the classical view of an automatic recovery,
believing that there were structural impediments in
the system—such as labor unions—which
would prevent such an adjustment from naturally occurring.
Keynes believed an economy could get “stuck”
in prolonged periods of unemployment and that only
with the aid of government intervention would an economy
return to full employment equilibrium.*** |
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WEBLINK: For more information on seminal economist
John Maynard Keynes, log onto:
John Maynard Keynes
http://www.econlib.org/library/Enc/bios/Keynes.html
Austrian economist Friedrich A. Hayek articulated the opposite
view, arguing that prices were essentially signals about
scarcity—money was an impartial and transparent vehicle
for such information. In this view, boom-and-bust economic
cycles were more or less unavoidable, and Keynesian-style
monetary policy would only distort the essentially efficient
adjustment process and make everyone worse off. Whatever
the theoretical merits of this view, its policy implication
in the Great Depression—do nothing; wait for the market
to correct itself—was impossible politically. So Keynes
won the day.
WEBSITE: A short bio of Friedrich A. Hayek
can be found at:
Friedrich A. Hayek
http://www.econlib.org/library/Enc/bios/Hayek.html
Keynesian wisdom became part of conventional economic thinking
in industrialized capitalist countries for the next forty
years. In a sense, Keynes saved capitalism from itself—that
is, he saw that we didn’t live in the perfect world
of liberal economic theory, and so posited a way of achieving
second-best aims with imperfect markets. Although many associate
Keynes’s name with big government per se, Keynesian
theory was aimed at building realism into a theory of markets,
not at a theory of market governance. On an international
level, Keynes’ ideas translated into a skepticism
about free trade, since the theory of free trade rested
on some of the same fundamental principles as the theory
of free markets and transparent money. Nonetheless, world
merchandise exports grew at a healthy clip in the postwar
period—at 7.1% per year on average between 1950 and
1970. While not the 11.1% of the thirty years that followed,
this accomplishment was nothing to sneeze at.
