- OPEC – 5 month embargo on oil to US and Netherlands (supporting Israel)
- reduced production –prices skyrocketed - gas shortages in US – consumer goods rose – prices rose – economic slowdown and inflation
- led to the need to change economic strategy
- liberal democracies faced a slowdown in the economy (recession) and inflation - Stagflation
- British PM Callaghan realized that they could no longer spend their way out of recession (Keynesian economics wasn’t working!!)
- A New Way of thinking: Monetarism
- Recession of 1970s led to a pendulum swing back to favouring the more classical liberal notion of laissez faire or free market (in some countries)
- Monetarism:
- Control of countries money supply is the best way to encourage economic growth and limit unemployment and inflation
- Money supply is controlled through the regulation of interest rates
- Inflation was caused by too much money supply (fault of the Central Banks over production)
- Argued that as money rises – consumer spending rises – demand rises – inflation rises....which leads to a recession
- Wanted money supply to be linked to the rate of inflation (an economic indicator)
- Critic of collectivism (and Keynes)
- Believed for collectivism to work the government needed to control the economy which would eventually lead to the government controlling social aspects of people’s lives
- Believed it was impossible for government to have the knowledge and ability to make all economic decisions
- Government controlled supply but would never have enough knowledge of demand
- Both promoted Price System, Free market
- Only way to balance supply and demand and maintain individual liberty
- Price System/Free Market
- There are 5 key characteristics in a market economy
1. Private ownership/freedom to buy and sell
- Goods and services must belong to the individual who is free to sell them for whatever price they can convince a buyer to pay
- The buyer is free to seek out the best deal possible
2. Free competition
- Businesses are free to produce whatever they want, however, many businesses can produce the same goods
- Competition helps keep prices low for consumers
3. Prices are set by forces of supply and demand
- Price is determined by how much is available compared to how much the consumer wants it.
4. Profit motive
- To make as much money (profit) as possible – ultimate goal
5. Consumer Sovereignty
- The consumer decides what will be produced with the resources available as they will only buy what they want
- Monetarism vs. Keynes
- Keynes – interventionalist
- Monetarist – more classical liberalist
- Margaret Thatcher – Great Britain
- Ronald Reagan – USA
ECONOMIC PRINCIPLES AND THE PRACTISE OF LIBERALISM
- USA argued that liberal goals are achieved by limiting government intervention and only providing the most basic social programs
- Drive for wealth arises from self interest and need to complete (individualism, classical liberalism notions)
- Canada, Sweden favour more government intervention
- Argue that inequality undermines liberalism as citizens fall victim to business cycle and struggle (modern liberalism – social safety nets)
- Still encourage private property and initiative but also believe in government intervention and taxation as essential elements of society
- The level of involvement depends on the status of the economy
- Sweden:
- **Social Safety Nets: generous welfare system, unemployment, maternity etc payments are extremely high in order to maintain standard of living of people
- Caused extremely high taxes to the people. Estimated that in the 1960s, 70% of the population depended on the government for its livelihood
- Reform was needed
- 1992 – Tax rates: 50% of income, Canada: 36.5%, USA: 29.4%
- 1993 commission made necessary changes
- examples: unemployment insurance in the former system provided 90% of person’s previous income, after reforms only 80% of income
- Example: sick or injuring – received 90-100% of salary. After the reforms worker had to wait 2 weeks and receive only 80% of salary
-
Canada
- Individualism (can have private ownership, individual rights) and collectivism (still look out for needs of society - social assistance programs, gov’t ownership
- Federal Level – (1990s)Canada has implemented some Keynesian Economics - put billions into building and repairing infrastructure
- Today: Harper – stimulus package to help failing economy
- Provincially (Alberta)– gone more towards supply side - Ralph Klein
- cut spending to reduce the deficit (education, health care)
- de-regulated to help improve business (less rules)
- privatization (AGT)
NOTE: Study Supply Side, Demand Side, Thatcherism, etc.