The 1920s and 1930s saw the rise of macroeconomics, business cycle theories and economic planning. Can these new ideas about the aggregate economy and new methods of doing economics be understood as revolutionary, in the Kuhnian sense?

The 1920s and 1930s saw unprecedented fluctuations and depressions in the worldwide economy. Between 1929 and 1933, unemployment rose by over 20% in the U.S. and this level became standard across much of the western Europe. Prior to the 1930s, classical economics was the dominant and most widely adopted of current theories on the macroeconomy. The foundations were laid upon Say’s law, which dictates that production is the source of demand, and also on the assumption that prices were flexible and that there is equilibrium at full employment. A theory based on equilibrium at full employment meant the classical economists did not focus on employment itself, but rather on the issues of growth and allocation of resources at the full-employment level. Two implications come out of this: Firstly, as supply creates its own demand any possibility of serious depression is eliminated. Secondly, markets are self-adjusting and will return to full employment following fluctuations. In the field of economics the Great Depression therefore raised some serious questions. Coats (1960) argues, there was ‘growing concern about the inadequacy of existing theory’. It was becoming evident that unemployment in the 1930s was not returning back to normal through market forces as classical theory predicted, and classical economists were having difficulty explaining how it could be possible that goods were going unsold and workers were unemployed. It also revealed another anomaly in classical theory, that of deficient demand. Tuncer (2008) explores this: In classical theory, all goods and labour are sold, because prices and wages would drop until they did so. However, there were other factors that were not taken into account. In reality wages and prices are sticky and not flexible. Since wages are a part of income, a decrease in wages reduces demand for goods, which in turn reduces employment. Therefore a decrease in wages means that employers won’t be willing to hire more people, as would be predicted if ceteris paribus held in reality.

Why were so many industries nationalised in Britain in the years immediately following WWII?

(Clement Attlee, Prime Minister 1945-51)

Following the war and the Labour Party’s landslide victory in 1945 over ten powerful industries were nationalised in Britain. Clement Attlee’s Party was seen as the country’s best hope for a revival from the war, ending war austerity and an avoidance of the depression of the interwar years. This meant a change of leadership. In this essay I will argue that so many industries were nationalised in Britain in the years immediately following WWII for three main reasons; the financial legacy of the war in the form of an ominous British balance of payments deficit, the war illuminating industries which full free-market capitalism didn’t work for and which central planning did, and the ideology of the Labour Party which saw government intervention as the only way to save these industries. These three factors, whilst not exhaustive, explain the reasoning behind public ownership in the period between 1945 and 1951.

The inclusion of non‐economic institutions is ‘vital’ in analysing historical economies.

Historians often exclude non-economic institutions from their analysis of historical economies. A non-economic institution is defined here as internal or external organising and correcting factors that provide order to the market and other societal institutions so that they may function efficiently and effectively. In this essay, I argue that the inclusion of non-economic institutions is vital when analysing historical economies. Allocative and social organisations have a considerable affect on the workings of a society that are often missed by Marxian and neo-classical economics. I will use the examples of trust, reciprocity, household, gift-giving and ideology to illustrate the line of thinking that whilst current economic theory may suit many situations this is a simplification of the broader picture. It is thus important to take into account other factors, or it is possible that details and important explanations within an analysis will be missed.

To what extent can the behavioural assumptions of economics be generalised across history?

Neo-classical economics is built upon a series of behavioural assumptions that can be reduced to three main characteristics: rationality, self-control and self-interest. Effectively an economic model of this type assumes that individuals will act in a way that achieves maximum utility, and as they pursue this goal the market will follow. In this essay I will argue that it is useful to use these assumptions to model and explain history, as is attributed to Friedman (1953) irrationality is a self-defeating idea, but the results should still be viewed within reason and with some skepticism due to the idea of bounded rationality and the fact that in reality individuals are “dumber, nicer and weaker than Homo Economicus”.

A Brief Explanation: The Curse of Natural Resources

Despite the presence of natural resources seeming implicitly advantageous, resource rich economies have shown very little economic growth and have often seen negative affects from their discovery. For this essay a natural resource is limited to resources that can be mined, such as oil, gold, diamonds and many more, rather than the smaller natural commodities such as soil type or a temperate climate - which have a little effect on the economy. Natural resource wealth ‘can be bad for growth and bad for democracy’, in what has become to be known as the ‘resource curse’. The curse has effects such as loss of foreign investment and crowding out caused by the Dutch disease, and can also have a direct link to civil war and corruption through its change of incentives that strain democracy, stall political change and change institutions- all of which contribute to the slow growth of an economy.

Why did international trade rise rapidly between 1870 and 1914?

Here is a short article (that misses many points that could have been made, such as mass migration and transmission of knowledge) that I wrote before christmas on the series of events that lead to the rapid increase in international trade between 1870 and 1914.

Between 1870 and 1914 global trade was growing at a rate that was noticeably rapid in comparison to the time period before, and included vast amounts of international trade in capital, goods and ideas. The rapid rise in trade between countries grew for many reasons but is greatly connected to what the World Bank sets out as the first ‘wave’ of globalisation that began in 1870 and finished in 1914. This period of globalisation introduced a reduction in transport costs, which increased the value of involvement with international trade and it also introduced fixed exchange rates and other benefits via the gold standard.

Did geography matter? The basis of economic growth in history - a brief overview.

After my last post concerning the economic growth pattern of Africa I feel an important follow on is the impact of geographical factors on growth - I wrote this article a few months ago and feel it will be interesting to those interested in the Africa post, and others.

Geography has played an important role in the differences between countries economic success and development. Some countries experienced more stable and long term growth that made them the most economically successful to present day and the path that links this growth to geographical factors can be easily followed. Direct links can be found between productivity and institutions, mortality rates and institutions, factor endowments and income equality, and distance and market access that leads to discussion on how much geography mattered.