Keynesian model

2) In the final analysis, Keynesian model triggered the neo-economic approaches in the world. Comment.

Keynesian model was very revolutional during and after WWII. The model offers state intervention, planning and welfare system. With the nationalization of coalmines, railroads, electricity and gas and banks, the economy was dominated by the public sector, leaving a only a little share for the private, hence, the state hold the power and control. Keynes believed in interventionism which required “planning”. States realized that they needed to plan their economies in order to have a healthier working system. The planning was very crucial for reconstruction and modernization in the post-war times. The fields that it targeted were full employment, and, economic and technological modernization. The government was responsible for providing stability and growth. In order to stimulate the economic performance, the governments were ready for intergovernmental cooperation, in contrast to inter-war years. The regulations were consisted of economic and social programs, which are about agriculture, housing, transportation, banking and insurance. The responsibilities of governments towards their citizens increased. Welfare policy offered health, unemployment, retirement and social insurance programs for people, which required higher taxes to be collected in order to make the redistribution of income. The “social capitalism” offered by mixed economy was very far from the “liberal and imperialist capitalism” of 19^th century.

But in the new globalized world the mixed economy and welfare state had to challenge the increased competitiveness. Welfare state had a lot of expensive services, which could even be called “luxury”. The high cost of production decreased competitiveness in welfare state. Welfare state provided lots of social benefits (i.e. health) to its citizens, which caused young population to decrease and old population to increase. With the improved work conditions, nutrition and life style, life expectancy is increased and the population aged. The old people are the pensioned population, who are paid by the state. If the young population decreases, the labor force decreases also. This means, one retiree’s pension is compensated by fewer workers than before. Europe was facing a serious decline in population and in labor force. Also the Europe had to compete with the other countries, which have lower social expenditures. The non-regulated world economy was a serious challenge for the mixed economy and the welfare state. There was a return to a self-regulated market system, where there are no regulations. In the mid 70’s, the movement against regulations, state-ownership, state intervention and welfare state has started. So, the privatization of state sectors started. The fixed exchange rate system broke down and the dollar started to float. The deregulation of the New York Stock Exchange and London Stock Exchange followed. Free and self-regulated market was better than regulatory states’ policies because state intervention creates higher cost and lower efficiency, which makes competition nearly impossible. After Keynes failed, Hayek was the most favorable economist of 70’s. What Hayek advocated was exactly the opposite of Keynesian model. Hayek believed that free competition could be possible only in a free market. He was against price and wage controls and any regulations. So the post-war regulations of the welfare state started to get cracked in 1970s.