How a widespread but false narrative is condemning us to economic decline

The post-war decades were the Golden Age of Capitalism during which most countries, successfully adopted a Keynesian view of economics.

But then, so the usual story goes, came the 1970s, the decade which gave us the phrase ‘stagflation.’ That dismal decade showed the weaknesses of the Keynesian approach. Thatcher in the UK and Reagan in the US then introduced a series of reforms and the era of market capitalism was born, relying on the dynamism of markets to drive economic success where governments had failed.

This narrative is hugely important in policy-making. If it is true that Keynesian approaches were tested and found wanting, then there is really no alternative to market capitalism; and though we may not be entirely happy with our current performance, it would be irresponsible to return to the pre-market capitalist consensus. But if that narrative is false, then by rejecting the alternative, we are condemning ourselves to continued and needless economic decline.

The data show clearly that the accepted narrative is dangerously wrong – indeed it is diametrically opposed to the truth:

• The Golden Age was indeed hugely successful for many countries around the world;
• The period since then has been far less successful; and astonishingly, given what we are normally told,
• The 1970s were more successful economically than any decade since, despite having to weather greater challenges.

The Golden Age was hugely successful for many countries

After the end of the Second World War in 1945, both among the victors and in the defeated countries, there was a clear need to rebuild national economies and a determination that the rebuilding should result in a better world.  Economically, the Great Depression was still a living memory, and those in power were determined not to make the same mistakes again.  Many countries duly experienced an economic miracle: Germany had its Wirtschaftswunder; France enjoyed Les Trente Glorieuses; Italy experienced Il Miracolo Economico; and Japan and many other countries used similar language to describe similar phenomena.  In the US and the UK, this period was termed the Golden Age of Capitalism.

There is some debate about the duration of this Golden Age: the late 70s were a period in which many economies slowed down and began to experience inflation.  The results were far less golden.  This has led some to date the end of the Golden Age to the early 1970s.  In this article, we have taken a different approach: since the dominant ethos – the way societies ran their economies – remained essentially the same until the end of the 1970s, we have credited these results to the Golden Age, which reduces the shine a little.  In the same way, and for the same reasons, we have credited the results of the Global Financial Crisis to the Age of Market Capitalism.  This seems a fairer way of comparing the effects of these two eras.

The economic historian Lord Skidelsky describes the Golden Age (which he dates from 1951 to the early 1970s) in the following terms:

“For roughly a quarter of a century after the Second World War, Keynesian economics ruled triumphantly.  No one wanted to go back to the 1930s.  Nationally, governments accepted responsibility for maintaining high and stable levels of employment.  Internationally, institutions, collectively known as the Bretton Woods system, were set up to prevent depressive forces from being transmitted through the international payments and trading system.”

In practice, this period also saw governments funding large infrastructure projects, creating strong social security systems, creating healthcare systems, and investing in education for their populations.

The period since 1980 has been far less successful economically

As Lord Skidelsky describes it:

“… by the 1980s both theory and policy had swung back to pre-Keynesian ideas.  Government was seen once more as part of the problem, not the solution.  Expansionary government policies were accused of fuelling inflation and crowding out better-informed private investment without reducing unemployment in the long run.”

The market reforms of the 1980s and later claimed to unleash the power of the markets – but they have been uniformly less successful economically. A simple comparison of the growth rates before and after shows that the market-based reforms produced worse results in the US, the UK and in most countries in Western Europe.

Figure 1: Real per capita GDP growth rates before and after Market Capitalism

In short, no leading economy performed better under market capitalism.

The 1970s were more successful than any decade since

The 1970s had to cope with an external shock to the world economy far greater than any we face today. During the 1970s, oil prices quadrupled and then almost doubled again – a total rise of almost 700% over the decade. Oil prices today are about 50% higher than they were 10 years ago and only around double where they were from 2015-20.

Figure 2: Oil price per barrel (nominal US $)

And when we look at how the 1970s coped with that extraordinary shock, what we see is itself a shock to most of us: the economy performed as well in the 1970s as it has in any subsequent decade – indeed better than most of them.

This is unbelievable to many people: we have all heard of stagflation – the combination of low growth and high inflation – a term which was coined to describe the 1970s experience. Can it be true that the 1970s were not actually that bad?

The Bank of England has helpfully compiled a historical dataset which goes as far as 2016; we have taken the data for 2017-2020 from the Office for National Statistics. What the Bank of England data show are that, although the UK economy did indeed slow in the 1970s, compared with previous decades, and suffered from serious recessions, we have never since had a decade with higher growth.

Figure 3: Long run growth in the UK economy

Despite the oil shocks, the UK economy performed – in real terms (i.e. adjusted for the higher inflation) – almost as well as the 1960s and the 1950s, as well as the 1980s and substantially better than any subsequent decade. The 2000s might have matched the 1970s if it had not been for the Global Financial Crisis; but that Crisis did happen, and our economy was demonstrably less robust than it had been in the 1970s. The 2010s had no external shocks to cope with – only a self-imposed austerity – and yet they were as poor as the 2000s (the decade which had to cope with the Global Financial Crisis).

The truth is that the 1970s were far better for the economy than were the 2010s. And the 2020s are not starting even as well as the 2010s.

And it is not just top-line growth where the Golden Age looks better. Many remember the waves of unemployment which swept Margaret Thatcher to power at the end of the 1970s. It is no consolation that the economy is growing if you don’t have a job. So again, it is worth looking at the facts. And again, they are rather shocking. Having come to power claiming that she would tackle unemployment, Thatcher almost tripled it.

Figure 4: UK Unemployment rates over time

In terms of unemployment, the 1970s were indeed significantly worse than previous post-war decades, but they were far better than any since.

But unemployment is less than 10% of the working population – what about the other 90%? How did the 1970s treat those who were in work?

Figure 5: Growth rates of real average wages in the UK

The answer is: surprisingly well. Despite the higher inflation, real wages grew strongly in the 1970s. From the 1990s, however, wage growth has been subdued. And from the 2010s, it has been dire.

Despite the oil shocks, despite the inflation, for most people, the 1970s were a period of increasing incomes. Each year, they could afford to buy a little more than the year before. Since 2010, under market capitalism, we have been getting used to the idea that each year we shall be able to buy a little less.

The charts above reflect most people’s lived experience. But they are also in direct conflict with what we hear from most media and many politicians. How could so many intelligent, successful people possibly be wrong? The chart below offers one possibility: they simply have a different lived experience.

For them, market capitalism has been working well, and they would rather not see changes.

Conclusion

The widespread narrative about the failures of the Keynesian approach is simply inconsistent with the facts – it is an inversion of the truth.

By accepting it and allowing policy-makers and their advisers to rely on that narrative to justify continued market capitalist policies, we condemn the UK to continued and unnecessary economic decline.

But by rejecting that false narrative, our MPs have the power to put the UK onto the path of national renewal. If you think this is important, please share this article with your MP and on social media.

And look at the 99% Organisation, and join us.