State and Economy Post-1945: A New Economic Order
The Mixed Economy and the State Since 1945
Since 1945, demand-side changes have led to economic growth. The composition of domestic spending remained relatively stable, with consumption and private investment growing evenly, as expected in a consumer-based economy with mass production. Exports and imports also increased, but the most significant change was the absolute and relative increase in public expenditure, linked to the development of the mixed economy, the welfare state, and democracy itself, upon the rise of citizen political activity.
The traditional commitments of states (army, administration, and debt) remained, but new economic and social costs arose, increasing the provision of public goods. The state contributed to growth not only from the demand side but also from the supply side. The welfare state has its supply side, strengthening the mixed economy. Government intervention in the economy found its legitimacy in Keynes’s view that large-scale unemployment resulted from insufficient demand, which the state was responsible for remediating and managing.
Post-War Keynesianism and Pro-Cyclical Policies
Post-war Keynesianism went beyond what was achieved in the 1930s. Active policies were implemented to prevent recessions and, above all, to achieve higher growth and full employment. These pro-cyclical policies required planning and designing for growth, not just short-term monetary or budgetary policies. Structural policies (industrial, social, etc.) were also implemented for growth, for which the existence of a significant public sector was substantial. Some capitalist countries even adopted indicative economic planning (different from the imperative planning of communism), which began in France with the Monnet Plan and spread to other countries.
The Mixed Economy as a New Regulatory Principle
The capitalist system was modified, entering a new stage. The state, in this case, the expression of an economic principle mandate, intervened in the economy but in a manner consistently articulated with the market. This created a mixed principle of regulation and coordination of the economy, surpassing the failures of both the market and the state. This constituted a radical institutional change, affecting the basic rules of the game in the economy and its main regulator (the concept of the invisible hand of Adam Smith).
The Keynesian Social Pact and Economic Growth
A dynamic virtuous circle generated growth, resulting not only from economic mechanisms but also from a certain social coordination rule embodied in the Keynesian social pact or agreement. This pact, signed between unions, employers, and the state, was embodied in collective agreements. Unions agreed not to claim wage increases above productivity growth to contain inflation, while employers agreed to invest corporate profits to promote employment. Governments acted as arbitrators between the parties and provided basic social services and benefits through the welfare state. This social partnership, the welfare state, the mixed economy, the development of democracy, and the rise of conservative parties formed a cohesive system of regulatory mechanisms that explain the exceptional economic growth in developed capitalist countries (DCCs) and the reduction of economic inequality.
Institutions of the New International Economic Order
In reconstituting the international order, the initiative and efforts of the US were decisive. After World War II (1945), the US broke with its isolationist policy tradition, opting to exercise leadership responsibilities and imposing standards of security and political and economic freedom. The political principles underlying the Atlantic Charter (1942) and the UN (United Nations, 1945) were complemented by economic principles established during the Bretton Woods conference (1944). In designing the new international order, the US, in collaboration with Britain, was determined by the dramatic experience of the depression of the 1930s. During that time, policies of hostility, economic siege, and isolation provoked a contraction of international trade volume greater than that of world production, prolonging the depression. Against this backdrop, a policy of non-competition, non-economic nationalism, and liberal cooperation was adopted. The new order was to be liberal, multilateral, and developmental.
Bretton Woods and the New Global Economic Order
When the famous Bretton Woods conference was convened to implement the new global economic order after the war, three areas were defined and outlined:
Monetary-Financial Area: Stabilizing Prices
The failure of successive attempts after the wars to restore the International Monetary System (IMS) led the conference to establish the foundations of a new IMS. The new IMS rested on the principles of fixed exchange rates, the dollar as an international monetary standard (having the same status as gold), and flexible exchange rates (currency parity could fluctuate between margins of +/- 1%). The International Monetary Fund (IMF) was formed as a regulatory body to ensure compliance with the rules and provide financial resources to countries with balance-of-payments problems so they could observe the rules. It was a system of fixed but flexible exchange rates that sought to maximize the benefits of the stability of the gold standard, which is why the IMF, a completely new institutional body, was created.
Financial and Investment Area: Promoting Development
The creation of the IBRD, known as the World Bank, resurrected an idea that emerged during the two world wars but was aborted due to the situation of international markets: to help finance investment projects in less developed regions of the world. In the early years of its existence, the World Bank granted loans to countries for the reconstruction of Europe. However, the Bank’s mission quickly faded because, in addition to limited availability of loanable funds, its functions were assumed by the Marshall Plan.
Trade Area: Liberalizing and Promoting Trade
The GATT (General Agreement on Tariffs and Trade) was created, not without difficulties, with a weaker institutional structure than the World Bank or the IMF. Still, it lasted until very recently (1995) and effectively fulfilled its mission of liberalizing international trade. The GATT combated all forms of protectionism that multiplied during the interwar period and established a liberal trade regime between nations or at least mutually acceptable protectionism. This allowed, among other things, the birth of the European Economic Community (EEC), which was, in principle, contrary to the principle of non-discrimination.