During the so-called ‘Golden Age of Capitalism’ in the 1950s and 1960s, the capitalist world economy was unprecedentedly successful. In the rich world, unemployment and inflation were low, and average productivity and real wages rose year after year for the majority of the workforce. In many poor countries, in the wake of independence from colonial rule, industrialisation began in earnest.
In both cases, interventionism was the fashion, encouraged by the experiences of some success in wartime planning, through a resolution not to repeat the economic collapse into the Great Depression of the 1930s and a belief in collective action. The ideas of Keynes and his followers were influential. The latter held that government could and should aim to manage the level and rate of growth of investment in the economy, as it was this which was held to determine growth and unemployment.
The policies applied varied between nations, from indicative planning in France, industrial policy in Japan and forms of tripartism in a number of countries, in which government, business and unions cooperated to achieve mutually beneficial development goals. In the UK, although economic performance was good, it was inferior to that of its European neighbours and Japan, and governments tried to learn from apparently successful policies applied abroad, in order to improve the nation’s performance.
The Golden Age came to an end in the 1970s, with a growth slowdown, rising inflation and unemployment and the discrediting of the interventionism of the recent past. However, despite the free-market and neo-liberal rhetoric that has dominated policy-making discourse at least until the Great Recession of 2008, governments have continued to intervene heavily in the economy. In some ways the spirit of Keynes has lived on, albeit in different forms.
What has changed has been the beneficiaries of the continued intervention. Deregulation, privatisation, tax cuts for the wealthiest and the priority given to the control of inflation rather than unemployment in macroeconomic policy have arguably played a significant role in widening inequality despite continued growth. Particularly in the US and UK, but also in continental European countries to varying degrees, the balance of power has shifted from labour to capital. Labour relations broke down in many rich countries in the 1970s, and the subsequent shift altered the pattern of growth and distributional outcomes since then, favouring an emerging elite and producing a much slower growth in wages for those on low and middle incomes.
Some of the changes of the last 30 years may be down to technological progress, which has benefited some of the most educated. But this is far from the whole story, as top earners who have gained the most are in reality a tiny proportion of the population, and many with a university-level education have seen relatively small benefits from continued growth. This elite has considerable power to lobby governments to enact policies which benefit their narrow constituency. The rise in inequality which has fuelled this change has therefore become a political problem as well as an economic and social one.
What can all this tell us about government’s power to affect the direction of the economy? Do policy-makers ‘control’ the economy or do they merely ‘influence’ it?
The continued recurrence of financial crises, recessions and unemployment, interspersed with periods of growth, demonstrates that capitalist development proceeds unevenly and with an unequal and often unjust distribution of income and wealth. While some of the latter is an outcome of an uneven distribution of individual capacity and productivity, there tends to be a random component to it as well as social and political influences. This provides a justification for some redistribution via the tax system and state spending on public goods which benefit the wider majority.
Governments and their advisors did not see the Great Financial Crisis (GFC) and Recession of 2008 onwards coming. As the crisis evolved, they stepped in and for a while at least, prevented the onset of another Great Depression. But a premature turn to austerity and the crisis in the Eurozone since then have proved disastrous for millions of livelihoods.
Thus governments in rich countries do possess a fair amount of power to change economic outcomes. However, their inevitably limited knowledge of a complex, evolving economy means that they have the potential to make costly mistakes as well as beneficial interventions. Rather than describing their interventionism as control, varying economic fortunes and policy outcomes within and across nations over time lead me to describe the effects of government intervention as merely influence.
There is an imperfect relationship between policy-making and economic outcomes. The evolution of capitalist development since the war and the onset of the GFC mentioned above demonstrates that governments should be ready for a range of potential economic problems with a variety of policy tools to hand. These can be monetary and fiscal, regulatory, industrial and technology and welfare. Their aim must be to influence rather than to control events and have a strategy in place for the medium and longer term, rather than only trying to ‘fine-tune’ the economy in the short-term.
Of course, politicians usually try to take credit for successful economic performance and apportion blame for problems to their domestic opponents or global events. This may be inevitable, but a more humble approach would be welcome and more in tune with reality.