The Breakdown of the Postwar Boom

Abstract

Mass unemployment has returned to Europe, and we know precious little about its causes and effective remedies. There is, however, a clear connection with the breakdown of the postwar boom. In the 1970s a long period of rapid stable growth abruptly gave way to sluggish, unstable growth and financial insecurity. The general consensus among economists is that classical unemployment increased rapidly during the 1970s. There are, however, manifest problems on the demand side. The international economic system is intrinsically geared toward contraction. The classical remedy—that is, lower real wages—could work in theory. In practice, it is too painful and wasteful to be politically feasible. The obvious measures are lower payroll taxes and social service charges in order to reduce labor costs without reducing wages; internationally coordinated demand management; and more employment-focused priorities.

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References

Guy Routh points out that very few articles about employment were published in academic journals in the thirties. Routh , The Origin of Economic Ideas (New York: Vintage Books, 1977), pp. 266-267.

It is worth pointing out here that it is logically possible to believe that market forces unaided by any “visible hand” would eventually bring back full employment equilibrium but still opt for government intervention because the automatic adjustment process, when it takes place in the real world, is too wasteful and painful. See, for instance, Don Patinkin , Money, Interest and Prices, 2nd ed. (New York: Harper & Row, 1965), pp. 339-340.

3. Don Patinkin , quoted in Blaug, Economic Theory in Retrospect, p. 652.

There is, however, no doubt that the expectations of investors formed a crucial part of his theory. “The weakness of the inducement to invest has been at all times the key to the economic problem.” Keynes , General Theory, p. 348.

Cf. also Lars Anell and Birgitta Nygren , The Developing Countries and the World Economic Order (London: Frances Pinter, 1980).

6. Jeffrey Sachs , “Wages, Profits and Macro-economic Adjustment: A Comparative Study,” Brookings Papers on Economic Activity, 2:269 (1979).

7. Ibid., p. 311.

8. M. Allais , Rapport d'activité scientifique (Paris: Centre d'analyse économique, 1978; 1980).

9. It is enough to recall that a higher level of aggregate demand may cause inflation. This was, of course, the only realistic way Keynes could imagine to lower real wages quickly. Today, however, increased inflation is hardly a proper solution to our employment problem.

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10. Jeffrey Sachs , “Real Wages and Unemployment in the OECD Countries,” Brookings Papers on Economic Activity, vol. 1 (1983).

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11. Jonathan Gershuny , After Industrial Society: The Emerging Self-Service Economy (London: Macmillan, 1978).

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12. Christopher Freeman , “Capital Shortage, Technology and Unemployment” (Paper delivered at the seminar “Technical Change and Employment,” Alborg Institute of Production, Alborg, Denmark, 27-28 Apr. 1984).

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13. Blaug , Economic Theory in Retrospect, p. 651.

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14. Patinkin , Money, Interest and Prices, p. 342.

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Samuel Beer , Britain against Itself: The Political Contradictions of Collectivism (London: Faber and Faber, 1982).

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16. Freeman , “Capital Shortage, Technology and Unemployment.”

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Helmut Schmidt , “The World Economy at Stake,” Economist, 26 Feb. 1983.

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18. Fritz W. Scharpf , “The Economic and Political Basis for Full Employment,” in Economics and Values, ed. Lennert Arvedsson et al. (Stockholm: Almqvist & Wiksell International, 1986).

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19. According to the polls in Britain, an overwhelming majority of the voters thought Labor cared about unemployment but only a minority thought they would be able to do anything about it.