Untitled Document

The role of the state in the economy after World War II

One important characteristic of the 20th century world was globalization, in economy, social practices, cultures, and religions. But underlying all the practices was the global market, formed after the downfall of Communism, and based very much on a free market economy. This is the foundation for understanding much that went on in the world in the past twenty years. The free market system, however, is really a synthesis of several forces, with the free market being one strong component, and government regulation being another, although somewhat weaker, component. Yergin's Commanding Heights, provides a good historical perspective on our economy, showing that our economic system is a product of the interactions between a force that gained momentum after World War I and called for greater government regulation of the economy, and a force that unleashed the market forces to replace government regulation after the 1980s.

A historical overview of the relationship between state and economy in the pre-1945 Europe and north America:

Before 1914, the world was moving toward an integrated market.
After World War I (1914-1918), there was a widespread doubt about democracy, and in some European countries such as Italy, Germany and the USSR, planned/corporatist/state controlled types of economies gained ascendancy. France nationalized many state industries.
Although the British government was in control of almost every aspect of industrial production during World War I, state control of industries and public ownership of coal mines gave way to privatization, although basic welfare measures, such as the pension system, was in place. The fear of socialism and the Soviet Union prevented the middle class English voters from holding for long onto a socialist government or a government that believed in extensive state intervention in society.
The 1929 world economic depression also led the US onto a road of greater government intervention in the economy, marked by, e.g., Franklin Roosevelt after his inauguration in 1933 provided relief fund for the unemployed and committed the federal government to carying for the unemployed, culminating in the institution of social security in 1935. Starting from 1937, workers began to acquire credits toward old-age insurance benefits.
After World War II (1939-1945), the US continued with the government regulation approach to economy, and much of Europe and the non-Western world embarked on a similar path, with many of the non-Western world adopting the socialist approach to their economies.

At the end of World War II, European economy was in shambles, and the United States towered above all other countries in the world as the dominant economic and political power in the world. A general world trend toward government regulation of the economy was reflected in the establishment of the World Bank, the International Monetary Fund, both arms of the United Nations established in 1945, and the establishment of GATT (general tariffs for tariffs and trade) (1948).

A summary of the various governments' approaches to their economy after World War II, with special reference to Yergin:

Britain:

The Labor Party was determined to have the state control the "commanding heights"--key elements of the economy, since the 1910s, finally gaining a chance first as cabinet members in the 1940s, and then as the government under Clement Attlee after 1945, establishing the welfare state in contrast to the power states that colonized and started wars.
Model of regulation: government serving as the corporate board of nationalized industries, including, among others, railroads, coalmines, healthcare, and education.
France:
Emerging from the war as a puppet regime under Nazi Germany, with economy annihilated as in Britain.
The state's outright or partial control of much of the economy.
Establishing the Compagnie Francaise des Petroles by the state, 1920s.
State control of banking, electricity, coal, and gas.
Halting nationalization in 1947 amidst the Cold War, becoming a mixed economy.
Jean Monnet and postwar economic planning for France and Europe.
- A member of the French Ministry of Commerce from 1915, Monnet worked on plans for economic collaboration between countries in Western Europe and the U.S. In 1945 Monnet was appointed as Planning Commissioner in France. In this post he became responsible for economic reconstruction and proposed a plan that became the blueprint for the European Coal and Steel Community (France, Belgium, France, Italy, Luxembourg, the Netherlands and West Germany) and chaired it in its first three years (1952-1955). This community was the beginning of today's European Union.

Germany:

The SPD: Social Democrats, and their vision for a socialist future for Germany.
Ludwig Erhard, director of economic administration, and ordoliberals (order and liberty): commitment to the free market and a social safety net; new currency (June 1948) and lifting price control (which triggered off the Berlin blockade by the USSR).
the Wirtschaftswunder (economic wonder): extensive public ownership of utilities, communications, and industrial companies, and tripartite management of economy by state, business, and labor.
Italy:
From IRI (Institute for Industrial Reconstruction, 1933) to ENI (National Hydrocarbon): state run refining company with many subsidiary companies.
Keynes and theoretical support for government regulation of the economy:
General Theory of Employment, Interest, and Money (1936): government, rather than the market forces, should regulate the economy, and deficit spending by the state could create jobs and increase purchasing power.
The United States:
The U.S. seemed to waiver between a state regulated economy and a free market in early 20th century before the Great Depression. On the one hand, there was the vigilance to business monopolies in early 20th century: Louis Brandeis:
- busting the monopoly Standard Oil (1911)
- designing the Federal Reserve System, the central bank of the United States, and the Federal Trade Commission (1910s).
On the other hand, there was also government championship of free market economy in the 1920s.
Meanwhile, public resentment against large private interests in the 1920s-1930s (Samuel Insull); regulation of business and monopolies.
- Before his downfall, Insull used to work with Edison and cofounded Commonwealth Edison. He then moved to Chicago and owned Commonwealth Edison, People's Gas, the Northern Indiana Public Service Company, and many more utilities. From electricity he came to acquire the major Chicago area interurbans (North Shore Line, South Shore Line, and the Chicago, Aurora, and Elgin) and the rapid transit lines which were merged into the Chicago Rapid Transit company. The Great Depression eventually brought down the utilities and transportation empire of Insull due to what became an overly leveraged financial position of his main holding company.
The Great Depression was the turning point against this wavering and the U.S. was steered on the road of state regulated economy: the establishment of the NRA (National Recovery Administration) by Franklin Roosevelt: regulating, rather than directly owning, the economy, and anti-trust, instead of concentration and planned economy.
Establishing the SEC (Securities and Exchange Commission) to protect investors and maintain the integrity of the securities markets (1934).
1935 Public Utility Holding Company Act: abolition of holding companies and allowing government to merge utilities companies for maximum productivity.
The same approach to the role of government regulation existed in the Kennedy and Johnson administrations.
- July 25, 1962 The Public Welfare Amendments of 1962 were enacted. This legislation provided for greater Federal sharing in the cost of rehabilitative services to recipients, applicants, and persons likely to become applicants for public assistance. It increased the Federal share in the cost of public assistance payments. It permitted the States to combine the various categories into one category; and to make permanent the 1961 amendment extending aid to dependent children to cover children removed from an unsuitable home.
- 1965 Housing and Urban Renew Act of 1965 (P.L. 89-117) was enacted. It authorized a rent supplement program which would provide private housing for low-income, disabled, and elderly people; expanded the public housing program to provide an estimated additional 30,000 new units of public housing for older people; lowered the interest rate in the direct loan program for building moderate income housing for the elderly.
- January 1966 States were authorized to set up new medical assistance and medical assistance to the aged programs, with the Federal Government to pay from 50% to 85% of the cost.
Nixon and his attempt to give government the power to freeze wages and prices in order to control inflation.
Why did Keynesianism not work in the late 1970s:
- Too many factors beyond government control, e.g. the Middle Eastern oil crisis (the rise of OPEC and its first flexing muscles in 1973, boycotting oil to the U.S.); the Iranian revolution (1979 and the Iran hostage crisis: American embassy members were kept hostage); the bitterness toward government because of the Vietnam war.
The Reagan administration and alliance between Reagan-Thatcher to restore a free market economy.