Post-war displacement of Keynesianism
The displacement of Keynesian thinking was driven by those who leaned towards purer free market policies, rather than the mixed economy which require a significant role for government intervention.
[8][9] Yet, in the decades following its establishment, the Mont Pelerin Society came to take a central role within a network of over 100 pro-free market think tanks located all over the world.
This ran counter to the then orthodox Keynesian interpretation that inflation was linked to employment, as modelled by the Phillips curve which predicted an inverse relationship between the two variables.
Governments at the time would use the Phillips curve as part of their models to calculate the expected cost in terms of inflation for a stimulus designed to restore full employment.
While the 1973 oil crisis was clearly an inflationary shock to the global economy, Friedman was able to argue persuasively that inflation was much higher than it would have been due to the rapid expansion of the money supply by governments in 1971.
By the late 1970s, empirical data was also present to suggest that Friedman was right to emphasise the role of expectations on inflation, further increasing the acceptance of his ideas by mainstream economists.
[4] Post Keynesian economist Paul Davidson has argued that part of the reason for Friedman's intellectual victory was that Keynes' ideas were misunderstood by the mainstream academics of the time (the Neo-Keynesians) who therefore didn't have a consistent framework to rebut the attacks.
[17] Even before the controls were put in place, international transactions were at historically low levels, as financiers and speculators had been weakened or at least made wary by the long depression of the 1930s and the war.
The 1970s were a key decade for this process, but financial innovation had begun to erode the effectiveness of capital controls as early as the late 1950s, an example being the Eurodollar market which the US authorities decided not to regulate.
They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system Keynes had helped to design, first began to break down.
[16] Further key events were the Nixon Shock of 1971 when conversion to gold was suspended even for governments, the collapse of the fixed exchange rate system in 1973, and the United States official abandonment of capital controls in 1974.
[21][22] Reasons given include a calculation by the US that with the erosion of the hugely favorable trade balance they had enjoyed for the first few years after the war, financial liberation would be a good peaceful way of promoting continued US hegemony as US banks were far more advanced than their competitors in the rival economies of Europe and Japan.
Laing in the counterculture and the thinking of Isaiah Berlin in mainstream academia, who to varying degrees were cynical of the Establishment's claims to want the best for folk, arguing that their true motivation was to advance their private interests or simply the thrill of exerting control.
[14] In the United States, Ayn Rand's popular novel Atlas Shrugged helped generate public enthusiasm for a return to laissez-faire capitalism—opinion polls have ranked her work as being the second most influential book on Americans after the Holy Bible.
[14][24] Journalists, Elliot and Atkinson, write that by the late sixties the younger generation had grown up with no experience of life before the managed economy, and therefore had no reason to be grateful to it.
[6] Buchanan and James Wanger's 1977 book Democracy in Deficit: the Political Legacy of Lord Keynes was one of the more effective attacks against remaining pro-Keynes opinion.
As had been predicted by Michał Kalecki in 1943, this resulted from the very success of Keynesian policy in reducing unemployment: an increasingly large proportion of workers had no fear of joblessness as they were too young to remember the pre-war years.
By 1980, the disruption caused to British society by the previous decade's frequent striking, especially in the Winter of Discontent, had contributed to public support for the anti-Keynesian programme of the Thatcher administration.
Eric Helleiner cites a number of sources to suggest the speculation related to the growing influence of Monetarism and opposition to Keynesian policy by the increasing powerful market players.
[5] In the US it was Reaganomics that fully displaced Keynesianism in 1981, again this had been preceded by a significant movement in the direction of monetarism by President Jimmy Carter's 1979 appointment of Paul Volcker as Chairman of the Federal Reserve.
[2][31] In France, François Mitterrand came to power in 1981 with a commitment to expansionary Keynesian policy, to help reduce unemployment caused by the worldwide recession underway at the time.
Similar to what had happened after Léon Blum's election back in 1936, many of the wealthy moved their money out of France, and by 1983 Mitterrand had been forced to largely abandon Keynesian policy.
[32] However, despite success in setting up franchises in Latin American universities and educating passionate individual free market economists, the efforts had little political effect.
India persisted with heavily interventionist policies until the early 1990s, when it began to liberalize after its 1991 crisis, though still retaining aspects of the mixed economy model such as extensive use of capital controls.
