What made a significant difference was quit simply the Marshall Plan, the willingness of the United States to supply Marshall Aid across the depression, which was now being threatened by the dollar shortage. This allowed Europe to maintain the pressure of demand without a series of balance of repayments set backs. Employment was maintained long enough for output to recover and for exports and investment to keep the ball rolling, and so protect Europe from any danger of a relapse.
Post war Europe however did not relapse but between 1950 and 1973 saw the highest rates of economic growth in the world. This was due to the economic circumstances Western Europe found its self in at the time. In advanced capitalist countries GDP per head was seen to triple, living standards, life style and culture all showed vast improvements.
Europe’s favourable supply side factors, such as a seemingly elastic supply of both trained and common labour, growth in investment as rates in return reached high levels and the availability of cheap and efficient energy supplies helped to boost the economy. Also the introduction of the Bretton Woods system of fixed exchange rates and convertible currencies helped to lower inflationary growth and add stability in financial markets as well as encouraging global trade. Firms started to expand into foreign markets bringing with them increased investment.
In the past governments had been strong advocates of the ‘laissez faire’ policy of intervention, but during the post war era many countries saw an increase in domestic policies. The role of the government became increasingly dominant as it implemented expansions of the welfare state and integrated Keynesian demand management.
The rising level of employment and productivty, by generating income and demand, was constantly renewing the need for more capacity and higher investment, and so in turn maintaining the pressure on resources. But was this process one that could go on indefinitely? Was it not to be expected that economic growth would slow down once needs of post war reconstruction where over? Many economists undoubtedly did expect growth to slow down up until the middle of the 1960s, but changed their mind when rapid growth continued or even accelerated.
The end of the ‘Golden Age’ never the less came suddenly in 1974-1975 after the first oil shock. In this sense the breaking point was brought about in 1973, not just by the quadrupling of the price in oil but also by the world economic boom which preceded it and drove prices up in all industrial countries across the world. The question economists wanted to know was no more, how long? But rather, why?
Ever since it became clear the forecasting of the post war economy, based on previous trends, did not reflect the reality presented by the ‘Golden Age’, economists started their search for reasons why?
Work by such writers as Maddison gave an explanation of the ‘Golden Age’ through an approach known as “growth accounting”. Observing a huge increase in the ratio of investment to GDP and incorporating technical progress, Maddison argued that investment itself was the main cause of Europe’s performance in productivity growth. For Maddison the implementation of new favourable policy and the increase in technology transfer led to the growth in total factor productivity.
Kindleberger, in his explanation however consentrated on an unlimited supply of labour. Drawing on a growth model derived from Lewis, Kindleberger argued that an elastic labour supply skewed income distribution, favoured profits, and thereby sustained unusually high investment ratios.
Lesser known is the exports approach by Lamfalussy which came to be known as the export-led growth explanation of the ‘Golden Age’. Each of these approaches met with serious analytical and factual criticism, largely from Craft.
These approaches failed to explain why investments or exports boomed only after the Second World War or why it was only then that there was an elastic labour supply. Also Craft’s critique of “growth accounting” states that the method concludes with a very high total factor productivity growth as largely going unexplained. This is denoted by a high “residual factor”. In Crafts model this residual is equivalent to technological change, which is stated as being endogenous to the model (it is an internal factor). Craft’s on look of the ‘Golden Age’ in many ways mirrors the views of Boltho, which draws on the ‘novelty’ of the post-war situation. This novelty is to be found in active aggregate demand management whereby government policies stabilised expectations and created an environment more suited to that of the interwar years. In Craft’s ‘overview’ of Boltho’s position Craft states ‘a more stable and predictable monetary environment seems to have a favourable impact on growth while the smoothing of the cycle does not appear to be relevant.’ ² However attempts at testing this hypothesis have provided rather mixed support for Boltho’s view.
For Olson the novelty of the ‘Golden Age’ was the breaking up of perverse distributional coalitions. This has been a very influential, yet highly controversial hypothesis. Olsen argues that in developed countries, economic growth tends to be held back by groups, or coalitions which try to prevent the reallocation of resources towards dynamic sectors and declining industries and instead pursue their own sectional interests. Hence severely crippling incentives to invest and innovate. Olson suggests that such groups would be difficult to organise, but they may slowly emerge if stable political conditions are maintained over time. Of course after war, invasion and the rise and fall of totalitarian governments, post-1950 had been purged of these perverse coalitions and created an environment where political and economical growth was more favourable. But by the 1970s and 1980s the problem had returned. Olson’s hypothesis was met by strong criticism, firstly was one of measurement. The chosen variables where poorly specified and exactly how do you go-about quantifying the strength and character of underground ‘distributional coalitions’, at the same time econometric evidence has not confirmed Olson’s assumption.
Kondratieff cycles, named after Russian-born economist Nikolai Kondratieff (1892-1938), refers to a of long duration. Kondratieff studied American, British and French wholesale prices and interest rates from the 18th century, and found that the peaks and troughs in economic activity fell at regular intervals. This long-wave hypothesis was revived by such economists as Mandel and Mesh incorporating a Marxian analysis of capital development, together with long-wave analysis to explain the ‘Golden Age’. This explanation proved itself to be impregnable to empirical testing as evidence of long cycles in key factors such as output, investment, and unemployment is limited and unconvincing.
In conclusion, was the period 1950-1973 deserving of the title ‘Golden Age’ in the history of economic science?
In terms of economic growth, output, increases in living standards, low unemployment and steady, acceptable inflation. The answer, in my opinion, would have to point to yes. However the survivors of these decades do not look back on them as a resounding success. ‘Those who presided over the Golden Age did not feel at the time that they were singularly blessed and carried in a golden coach’. People are more likely to remember these decades as ones of repeated crises. There were currency uncertainties almost throughout due to balance-of-payments difficulties, and if they think to the economic experiments of the 1960s, they may look on how many were later abandoned.
So if the question was asked again in terms of whether the economist using all his tools guided the economy into a ‘Golden Age’ of success the answer may be somewhat negative.
If taken individually, each explanation of the ‘Golden Age’ reviewed proves to be lacking and inadequate. However taken together they provide an insight to the main factors that helped to sustain the ‘Golden Age’. High investment rates were critical to the transfer of technology; exports provided rapidly expanding markets; the abundant labour supply helped the allocation of manpower to the more technologically advanced industries as well as the moderation of wages and stabilised expectations reinforced the investment drive. But why did these ingredients catalyse and produce rapid growth at this point in time, from 1950-1973?
‘Economists possess their full share of the common ability to invent and commit errors…. Perhaps their most common error is to believe other economists.’
G. J. Stigler
