New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Material for final

by: Srishti Notetaker

Material for final ECON 324

Srishti Notetaker

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Study guide on readings and notes for the final exam
Western Economic History
Joel Mokyr
Study Guide
Western Economic History, Economics
50 ?




Popular in Western Economic History

Popular in Economcs

This 39 page Study Guide was uploaded by Srishti Notetaker on Sunday March 27, 2016. The Study Guide belongs to ECON 324 at Northwestern University taught by Joel Mokyr in Fall 2016. Since its upload, it has received 34 views. For similar materials see Western Economic History in Economcs at Northwestern University.


Reviews for Material for final


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 03/27/16
Ch1 (he hasn’t given us Ch2 on Canvas…)  Two periods of the conflict:  o First period (1941­1942) – military factors more important than pure economic  considerations, advantages of strategy and fighting power enabled Germany and Japan to inflict overwhelming defeats upon an economically superior combination of powers   o Second period (began in 1942) – economic fundamentals reassert themselves, early  advantages of the Axis were dissipated, superior military qualities counted less than  superior GDP and population numbers (relating to US mass production methods >  quality); quantitative superiority and greater Allied capacity in general economically  turned against the Axis  o Ultimately, economics determined the outcome of WWII  Population, territory and GDP o Territorial expanse of great importance in addition to pop and GDP o Axis is disadvantage (Germany and Japan) o Allies were beneficiaries of globalization   Population higher o Wherever the Axis powers conquered, incomes fell and difficulty of extracting resources from the conquered territory increased   At the same time, their enemies mobilized resources   Became richer and more economically powerful before the far o Prewar GDP of combined Allied powers exceeded that of the Axis powers  o In 1941, Soviet GDP was also beginning to fall   Under the impact of the German attack  o From 1942, the GDP ratio moved steadily in Allied favour  o Soviet economy – hit hard by invasion in 1941 and harder in 1942  Subsequently stabilized and then mobilized to higher output  o GDP of France fell steadily year by year  o By the end of 1944, German and Japanese economies collapsing  o Thus, in 1942 and 1943:   Great­power economic balance moved strongly in favour of the Allies  o Only on the eastern front did Allies not posssess the advantage   SU had more than twice Germany’s population and many times its territory but  1938 per capita income was 40% of German level   German economy grew under the stimulus of increasing mobilization   Substantial German advantage  o With recovery in 1943, Soviet economy was able to establish a narrow advantage   Size and development o GDP distributed much more unequally between Allied territories than Axis o By 1942, Allies had richest super power and poorest  US and China  o Development level was significant in the following way:  When poor countries were subjected to massive attack, regardless of size,  economies disintegrate  Exact mechanism of disintegration vaired but already present in peacetime, in a  low­productiity, poorly commercialized agriculture, and a general lack of  resource diversity   Poor economies – even large ones – relied too heavily upon agriculture and could not afford a wide assortment of other activities   The more industry was concentrated upon war production, the less was left to sell to peasants and foreigners in exchange for food and oil   USSR: low­income power – Soviet economy provides exception to the rule  because actually didn’t collapse under attack in 1941 although every historical  precedent suggested that it should have done so  Italy and Japan suffered most from disruption of external rather than internal  supply, becoming deprived of their imports   In 1945, wealthier German economy also collapsed at last  In general terms, may be argued that outcome of the war was decided by size but  nevertheless, if a large pop and a large GDP were both highly desirable, a large  GDP was better because of the developmental advantages it came with   Basically: higher development meant better outcomes in the war   With exception of Soviet Union – displayed capacity for military  mobilization of a much more highly developed economy despite its  relatively low income level  It did not go down despite attack in 1941  Soviet economy – although much poorer than Italian – did not collapse despite  initial loss of wealth and income – mobilized rapidly, shifting 44% of GNP from  civilian to military uses in 2 years   Soviet economy devoted 3/5 (60%) of National Income to war effort – Soviet  success partly due to size in population and GNP, and virtually self­sufficient  before the war (communism)   But… size not sufficient for economic survival under attack   Link between development and mobilization capacity o The determinants of Mobilization   Mobilization essential to war strategy of each of the powers   Soviets also began to mobilize in peacetime   Factors affecting mobilization: distance from the main theatres of fighting and  the wartime economic system  Soviet most centralized  German economy hindered by party interests vested in economic slack and  bureaucratic infighting which prevented effective coordination  o Remained relatively unmobilized until heavy Allied bombing   The factors affecting mobilization were proven wrong during the war –  Japanese economy centralized but success came later  o Soviet economy became even more highly mobilized   What was important was to be able to maintain economic integration under  intense stress o Italy and Japan lacked this – economies were small on global  terms, heavily dependent on international trade, far from self­ sufficient in fuels and other industrial resources   Development level insufficient to compensate  o USSR – low­income, newly industrializing economy – able to  avoid this fate. Offsetting poverty were advantages of size, access  to Allied resources, and above all, an effective system of  economic integration that gave it resilience under the kind of  pressure that destroyed the old Russian empire in WWI o Soviet economy held together by coercion, leadership, national  feeling, by centralized planning and rationing, and by a system for food procurement which ensured that farmers could not deny food to the towns   Quality and quantity  o Germany and Japan – did not have the military capacity in quantity  o Qualitative factors exercised a major influence over the course of the war  Quality, not quantity of German and Japanese military resources – postponed  their defeat   Forced their wealther adversaries to accumulate a vast  quantitative advantage in personnel and weapons before the  defeat of the Axis could be assured   In the closing stages of the war, both Germany and Japan able to delay defeat by using advantages of the terrain but also  qualitative feature of the G and J soldiers that consistently  maximized these advantages   Even when hampered by huge material inferiority   Axis = qualitative superiority   Refer back to lecture too here, US mass production methods = lower quality, Germany and Japan =  higher quality, much better military forces and  arms but not able to capitalize on quantity –  Germany also has skilled workers (vocational  training) so not enough unskilled workers to  produce   Qualitative development of weaponry was very important in  evolution of the war, the development of war production, and  the mobilization of industry   Qualitative development cannot be understood in  purely national terms – the technological  improvement of weaponry was a global process all  military powers participated  Each country produced at least some high quality  weapons although probably only Germany did it  across the board   In Russia in 1941, Germans encountered superior  tanks and were driven to fresh efforts of  innovation; by 1943, German tanks were superior  than existing Soviet models and now Soviet  designers had to run faster to keep up – same  process was visible in design of aircraft, in the  rivalry to match and exceed the enemy’s speed,  manoeuvrability, armament and raarr tadar  o Strategic choice also played a role   German and Japanese strategy  Relied on quanlity of armies and armament to  compensate for their deficiencies in the quantity of  overall resources   At sea Germans tried to compensate for the Allied  surface fleet predominance by means of submarine  technology   British and Americans failed to produce good tanks but compensated with fast­moving, well­supplied  infantry supported by excellent means of tactical  air power   Russians did not compete in strategic air or naval  power but did not need to do so   Thus, not every country produced high quality  weapons, but no strong correlation with economic  development level   SU had excellent defense industry despite being  poor by Eu standards   Japan and Italy – produced high­quality ships and aircraft   Only numbers deficient   Germans produced most weapons better than America,  although America was the richest of the great powers   If Russians made priority out of tank design, then Germans  made quality of weapons in general their priority  Germans, as a medium sized industrial power,  could not compete in quantity   But was still well enough developed to be able to  compete in quality across board  o Important to stress that quantity was essential to the Allied  strategy   Allies knew they could not make better soldiers than the  Germans or Japanese   Could not make better guns, ships, or airplanes but  they could make more of them   In the west, the Axis powers could only be beaten  by an immense numerical advantage   This is what the Allies accumulatedi n 1942­3  Winning the war, losing the peace  o Postwar convergence – catching up  Refers to the gap between the productivity leader and the  followers – leader = US  Alpha, beta convergence   Income inquality as a result of Soviet Union’s failure to  converge   Finally, process is shown to have been regionally rather than  globally convergent – western Europe and Japan   Slow postwar economic growth was common to US, Britain  and SU, while growth of Germany, Italy and Japan more rapid  In other words, former Allies now losing side in postwar  growth terms – victorious in wartime  Cliché that “those who won the war lost the peace” – grain of  truth   Britain and US grew more slowly after the war because they  were already immensely rich   Losers grew more rapidly because they had to make up  substantial war time losses   Catching up   Only the SU began poor, lost significantly, and remained poor in relative terms despite reasonable postwar growth  o The influence of the war   Global economic integration – cause of an integrated world  economy received a decisive boost from the outcome of the  war   American thinking found one fo the causes of WWII in the  interwar disintegration of the world economy, and the spread  of great­power protectionism within trading blocs   Italian and Japanese wartime experience showed impossibility of autarkic mobilization – convinced postwar leaders that each must find its place in new worldwide division of labor   Thus, Americans and former enemies plunged back into the  market   All these countries became active participants in multinational institutional framework of postwar global economy – IMF,  IBRD (later World Bank), and GATT  Only British and Soviet empires survived the war – Soviet  empire soon greatly augmented by adherence of east  European satellites, whereas British would preside over the  dissolution of theirs  o Capital Accumulation   War imposed great losses of both human and physical capital  upon great powers   Two poorest countries – USSR AND JAPAN – suffered  greatest losses   Losses of physical capital typically outweighed those of  human capital, at least in % terms   War itself saw significant industrial movement   For Germans, industrial fixed investment was an  effective countermeasure to Allied bombing of the  German war economy   Postwar stock of industrial fixed assets was not less than  prewar stock – Germany Italy Japan   After the war, each country embarked on a further drive of  physical accumulation to restore the war losses and the  general pattern was for domestic investmenr ratios to be  substantially higher after WWII than interwar period   Investment was stimulated everywhere – Eichengreen termed  it the ‘postwar settlement’ between firms, workers, and the  state   Under this settlement, firms pursued high  investment policies in exchange for workers’ highe effort and wage moderation on one hand and on the other, government actiism to stabilize aggregate  demand and the international trading environment   German and Japanese industry emerged from war with  enhanced emphasis on job rights, craft training and worker  participation   Human cap investment directed towards skilled  labour and apprenticeships   American emphasis on unskilled labour for standardized mass production efforts   Investment in R&D – knowledge capital   Boosted everywhere  Process in SU more centralized – more emphasis  on national goals, particularly defense fields   Germany, R&D more about innovation – diffusing  innovation capabilities throughout industry by  means of investment in supportive processes   On average, defeated had lost more heavily than the victors –  G, J, SU suffer  Vy 1950, Soviet economic growth either resumed its prewar  trend at a lower level of GNP than before the war or was  undergoing temporary acceleration on a path of recovery –  little evidence of permanent acceleration – institutions  o Mass production/flexible production  Factor that differentiated losers from winners was the shared  commitment of postwar American, British and Soviet industry to an American model of technological leadership based on  centralized, mass­scale production   Allied countries were each enormoustly impressed by victory  of American standardized mass production   War Experience Aided  Soviets moved towards American mass production model in  interwar period now intensified it uncritically   Postwar British attitudes also shifted to Americanized  thinking   Craft production failed – G, I, J learned  Quantitative superiority of Allies in weaponry based on  standardized products in a limited assortment, interchangeable parts, specialized factories and industrial equipment, an  inexorable conveyor belt system of serial manufacture and  deskilled workers who had neither the qualifications nor the  discretion to alter designs or specifications   As long as the German system emphasized the small firm, the  artisan, and the continual improvement of the product,  German industry was condemned to low utilization, high  costs, and small quantities   Only in 1942­1943 did Germans begin to break with their own tradition and convert to a mass production technology,  making  An Economic History  + Feeling of social partnership engulfed Europe after the War (WWII) + “A cooperative equilibrium” created – workers and capitalists exercise restraint  +  WEEK 6: THE COLLECTIVIST ECONOMIES Communism = the ultimate command economy Marxism = based on historical materialism that denies the primacy of ideas integral to economic change yet ironically, it is the foundational concept of Marxism-Leninism “scientific socialism”. Forces not individuals Command economy: some evidence suggests that under some circumstances planned economies can work – war economies of the democratic west in 1914-18 and 1939-45 + But in the long run and under non-emergency conditions, they lack the efficiency, innovation, flexibility of market-based economies + In LR, decentralized market economies have more capability to generate and agility to adapt to innovations Was Communism a failure or success? 6 Stages of the “collectivist experiment”: 1. War Communism (1918-21) 2. The NEP (1922-28) 3. The two five-year plans after 1928 4. The Second World War (1941-45) 5. Post War Communism under Stalin (1945-53) 6. Post Stalinist Communism (1953-89) We need to admit the major success of the planned economy of Russia + List examples – growth rates achieved are way higher than in Czarist period in Russia (diffusion of western technologies, better allocation resources) Against that, we have to consider its failures + Horrendous price of the loss of life and human rights, extinction of civil society, political freedom + In long run, Soviet system failed to keep up with rising living standards in the West due to coordination failures, asymmetric information, bad incentives (especially after 1950) – its institutions are subject to the above + poorly defined hierarchies Before Communism, there was Russia Czarist empire What kind of economy was Russia in 1914? + Low literacy rates, low income per capita (high growth per capita between 1890 and 1914 starting from a low level), despite high population growth incredibly high output growth, high savings rate, high rate of capital inflows, high marginal product of K rapid adoption of foreign technology thanks to France Largely Agrarian economy + Major exporter of grain and importer of capital, expertise The Russian “spurt” between 1890-1914 + Rapid increase in output of coal, textiles, iron, petroleum, oil + Proved that an autocratic country can be creative – unleashed + Needed structural change Czarist Russia (autocracy)  SU: Communism, command economy (Marxism, led by Bolsheviks) What would Czarist Russia have had to do to develop in the 20 thCentury? + After WWI, agriculture did poorly – worldwide – Russia could have been in trouble Czar stayed + Industries built under the Czar were more resource-based or infrastructural + Russia had high natural endowments that a smart labor force could exploit in free market context + However, literacy rate was 28.4% in 1897 Economic history of Russia is proof that economic outcomes depend severely on underlying economic institutions + Deeply handicapped by devastating corruption, lack of a civil society, and incompetent and predatory government + Suffering from abject poverty and low living standards even today Following the revolution of 1917, a few important developments occur: 1. War Communism – establishment of a large-scale command economy run by the Bolsheviks leads to widespread famine and emergency conditions 2. Hyperinflation (prices increased by a factor of 8,000 in Bolshevik sector) – total disintegration of mkt economy, prices as a % of their 1913 level (exports, industry, transportation, agricultural) SU in 1921… + Famine + “Famine-diseases” + Even cannibalism + High mortality rate + 7 years of war, disruptions, disruptive economy + Neglect of infrastructure +++ But powerful and focused leadership brought law and order back in 1921 Other developments: Growing isolation Land ownership Nationalization of large industrial firms, railroads, merchant fleet, overhead Within the new SU, fierce debates on how to proceed (Berend, pg. 250) – Lenin NEP + Combined planning and market economy in a way that worked + Medium enterprises, private ownership, management in retail denationalized + Large industrial enterprises given more autonomy + Peasants allowed to keep profits + Remonetization + Economy did quite well until 1928, industrial output 30-40% higher than in 1913 + Some trade re-opening NEP Dilemma + If terms of trade turns against agriculture, peasants will withhold grains and starve urban sector + Prices too low, peasants withhold grains from official markets, cause scarcities + Led to “scissors crisis” in 1924-25 + scissors crisis = change in the relative prices of agricultural vs. industrial Scared Bolshevik planners – thought that peasants would revolt and withhold grain – creating scarcities, eat it themselves, not have incentive to produce much grain or take it to market; lower prices of agri goods also could mean that peasants buy less manufactured goods and slow down the industrialization they planned 1. Farmers / peasants buy less industrial goods – slows industrialization 2. Farmers expend less effort into producing more with lower prices and withhold grains – scarcity, consume more, and take grains to market infrequently + Real reason this happened was simple economics: supply response in farmers was much stronger with liberalization and NEP – output rose quickly and ‘slid down’ a relatively inelastic demand curve + Manufacturing – output increased slowly, as goods needed for repair of facilities and equipment – dd for industrial goods is more elastic But what the Bolshevik planners didn’t realize is that while ouput increases, farmers have lower income in the form of lower prices, this is MORE THAN MADE UP FOR in the fact that food prices are now cheaper so people (many farmers) have more to spend on other goods: manufacturing Moreover, little evidence that farmers reduce their effort when prices decline; and if farmers taking less to market, then supply decreases and prices would recover LESSON FROM THE “SCISSORS CRISIS”: NEP was moving in the right direction but the SU’s planners were orthodox Marxists who did not understand the functioning free markets and needed to control all aspects Could the NEP-type economy have worked? Stalin and his colleagues threw Russia off the path to a successful mixed economy. Others, Robert Allen, say peasant and agricultural sector was unproductive, labor surplus, and without Stalin’s 5 year plans, the economy would have looked more like Argentina NEP was unable to resolve main objectives: rapid growth of heavy industry, elimination of surplus labor in countryside, regular supply of grains to urban centers. “Rapid industrialization” was perhaps not the right objective under the NEP. NEP dropped in 1928-29, replaced by five-year plan + Five facts of the 5-year plan: investment doubles heavily, price mechanism dismantled and state controls allocation of resources absolutely, reorganization of agriculture towards more collectivism, move to urban center from 28 M to 55 M, concentration on heavy industry, accelerated capital formation in heavy manufacturing, electrification, mining Agricultural collectivization – one of the worst INSTITUTIONALIZED SHOCKS + Effects: great Ukrainian famine of 1932-33, 11 M casualties out of which 3-7 M in Ukraine, famines elsewhere in Georgia, Kazakhstan; wilful destruction of the Kolaks, wilful destruction of the Kulaks through De-kulakization Output falls sharply under collectivization; slaughtering of animals because resistance from farmers Collectivisation = good thing? Deteriorating rural conditions means people migrate faster, leading to urban growth; slaughtering animals means more grain available for peasants; less surplus labor on countryside as more migration Peaceful collectivization worse for growth because growth occurs through composition effect changes By mid-1930s, majority of peasants on collective farms (Kolchozes) + Agriculture = highly heterogeneous sector with a lot of local variation – central planning is counterproductive + Incentive structure is messed up – carrot vs. stick + Didn’t incentivize farmers in the right way, only gave them tiny private plots (gardens) Industrialization is mostly carried out by planning + Demand-side missing + Material balance planning – method used by Gosplan + No consideration of consumer valuations, opp costs, or people’s wants – vast inherent inefficiencies Secret of Stalin’s industrialization: women – employment in heavy industry (birth rate fell from 1913 – 1937 – 1950) Living standards – biased upward Life expectancy – tried to improve public health and sanitation but collectivization of agriculture + Decline in food production – decreased life expectancy to 47 (was 61 in Britain and Germany) How do we assess communism as an economic system? Not built to maximize consumer welfare and instead, “workers’ paradise” transformed by corrupt and incompetent bureaucrats.  no high- powered incentives  Stakhanov record production  Stakhanovite movement  Second Five-Year Plan productivity doubles than first + Reflects what was wrong with Soviet thinking – “capitalist” notions rejected (productivity, efficiency) Could this have ever worked? + Planning – top-down + Quantities, prices, quality + Industry favored over agriculture, heavy industry over cons goods – no rationality + Investment > consumption + Poor incentives for workers and managers – no price-mechanism based allocations + No incentives for innovators and entrepreneurs Why did the Soviet economic system fail? 10 REASONS: Macro 1) Saving: inconsistent time pref, no good way to do efficient intertemporal substitution 2) Growth philosophy: incorrect notion of increasing growth by redeploying inputs a. Not increasing efficiency b. All about output and quantity maximization, not cost minimization 3) Consumption – low, less than 1/3 of US, consumer sovereignty absent 4) Investment – favored I over C, Industry over agriculture, HI over CG a. No rational basis b. Too much investment – wasteful public showcase projects (Sputnik); overinvestment and underinvestment in wrong sectors 5) Trade: closed economy, desire for “independence”, insulated prices and quality 6) Technology: great capability but not acted upon, most R&D used for military AND space programs after 1945; little communication between researchers and firms – no incentives and payoffs from innovation are low a. Attempts to steal Western technology through reverse engineering and direct espionage – unsuccessful because of lack of complementary human capital, western embargos, little interaction with the West, autarkic policies Micro 7) Incentives: no inter-firm competition, no substitute set of rules for profit maximization and cost minimization; firms were given quantity targets instead of efficiency ones instead and all market mechanism planning that prices would do was planned instead – no price-based-mechanism-planning – heavy hand a. “Soft budget constraint” – firms did not go under, expectation of bail out by the government, workers did not expect to be dismissed and no effort to save on inputs or cost-savings measures 8) Economic organization: plans made by planning agencies but unclear about top-down, bottom-up or both. No substitutes for profit maximization or price-mechanism-based-allocations – only heavy hand of planners. Prevented any kind of spontaneity or adjustment to the efficiencies of markets 9) Information flows and control between principals and agents a. Top-down planning – not enough information at the ground level b. Information travelling from agents to principal – firms to govt – accuracy is ambiguous and not accurate – firms colluded to make this happen – to avoid penalties and over-ordered raw materials to prevent falling short of their targets – misreported information, no accuracy 10) Underground economy: most of it legitimate but got around the hands of heavy-handed officials and corrupted bureaucrats – not the same as corruption – just got around the heavy hands of planners and corrupted authorities – blat – personal connections and favouritism dominates when intermediate inputs have to be purchased on “unofficial channels” + Growing corruption after Stalin’s death in 1953 1. Entrenched interests 2. Narrow minded idealogues a. Prevented the faltering system to reform in 1950s after Stalin’s death Ultimate failure: The SU lost the technological race with the rest of the world. (Elaboration Point 6) + Failed to generate new technology + What was driving efficiency and success in the West was competition – none here, especially with lower incentives to innovate and low payoffs + To everyone’s surprise: Soviet Union unable to compete with the West – this is primarily driven by bad governance – great individuals like Mendeliev as chemist, mathematicians Markov, Lyapunov, and Chebychev, and artistic giants such as … + Attempts to educate the masses to 100% literacy by 1950s and 1960s + Shocking – lost the race with the West even after investments in human capital, creativity endowments, and high resource endowments – failed to absorb new technologies from the West Raises deep questions about the institutional roots of technological creativity + Institutions have the power to reward and punish – SU suffered from bad governance, lack of incentives around innovation + Unable to produce goods and services of rising quality, Soviet regime lost its legitimacy + Soviet regime collapsed Why did the Soviet regime collapse? + For success, countries must foster the ability to innovate, reward this, provide high-powered incentives, patents, which entrepreneurs did not have + Discouraged those who “think outside the box” + Totalitarian regimes fostered conformism, suppressed heterodoxy – direct meddling by totalitarian regimes into what was “good science” – led to Lysenkoism Then there was the impact of collectivist economies on the environment + Irony: free market considered to be ignorant of social cost and negative externality, planned economy the government takes into account total social cost – not what happened + Marxist labor theory of Value had no room for natural resources – did not think scarce + Eastern Europe and Ukraine: brown coal (lignite), babies born with deformities, high incidence of local cancer epidemics + Poland, Czecoslovakia, East Germany + Bulgaria, Romania, Slovakia In a world ruled by production targets, there was no pressure to clean up – NYT, 1990 The “Aral Sea” Project – attempt to divide two rivers that feed the Aral Sea to irrigate lands and grow cotton – 10% volume of water as compared to what it used to be, salinity 10  100 g/L, ecosystems wiped out tourism fishing industry toxic chemicals pesticides insecticides weaponry systems 1. Salination and desertification 2. Salt water – summers hotter, winters cooler, areas of salt deposited on land, destroying crops – salt plains create dust storms, leading to ^ 3. Ships rust far from any water sources On top of all of this, nuclear waste – Chernobyl disaster of 1986 Planned regimes had no regard for real welfare and just quantity maximization, and Western countries wanted to start a “Marshall plan” on environment – absence of democracy made it difficult to start an environmental movement through a political channel that could exert political influence Eastern Europe after the War + Some countries already pretty industrialized: Czechoslovakia, East Germany + Some countries agrarian and backward: Romania, Albania, Bulgaria + Some mixed: Poland, Hungary ++ Note that some of these countries faced rapid growth after the war, so cannot write them off as failures Not all was bad in these countries Full employment, low literacy rates, growing opportunities for women, medical care, pensions, insurance, education, lower inequality even after taking into account the nomenclatura, State Terrorism low after Stalin’s death  At least at first there was some growth (recovery from the ravages of 1929-45) o In the first decades of “iron curtain” hard to tell which side is growing faster o After 1973, becomes much clearer: West is growing far more, East is not at all; West growing slower, East not at all o In fact, things turn out to be much worse… keep reading Policies were put into place that yielded high and impressive growth: “Rebound” from devastation of the war, some of it due to reallocation of labor from agri  industry (but longer working hours at the expense of leisure), many countries asked West for loan assistance, tech assistance, help What explains the poor performance of the East European countries? + Heavily agrarian, damaged heavily by WWII in 1945 + Serious “brain drain” – talented artists, scientists, authors and engineers, Germans exiled / fleeing from Eastern Germany to the West + With the exception of Czech, few countries had good institutions to start with: low functioning labor and capital markets, no institutions that helped create human capital, governments that invested in operational infrastructure + High corruption and violation of human rights Communism added to this: By 1948, all Warsaw Pact countries taken over by Communist Parties + Forced to do what Soviets did in the 1930s: 5-year plans of accelerated industrialization, collectivize agriculture + Principles were the same (read slides): emphasis on quantity, not prices for resource allocation and production, increased labor force participation (women), increased reliance on West (Dacia relied on Renault, Yugo on Fiat for designs) but poor execution, decreased international competitiveness and trade, agricultural > manufacturing and services, heavy industry > consumer goods, little investment in housing and apartments low quality, over-investment in inefficient industries like coal mining (misallocation of resources), emphasis on investment (50%), no emphasis on innovation and international competitiveness, labor shifted from agriculture to industry – as happened in Russia Fundamental issues in these planned economies: similar to SU + P-A problem: asymmetric information, managers lying about production requirements, planners also unaware of what is happening on the ground-floor level + Misaligned and poorly designed incentives: quantity > quality + diversity. Rewarded for meeting production targets but managers raised target or reduced piece rates instead; on the other hand, “soft budget constraint” – knowledge that managers will get bailed out by the State – MH problem In Eastern Europe, lack of innovation and overinvestment like in SU But unlike Russia, many Eastern European countries resisted planned economies – built German wall to prevent fleeing, serious brain drain anyway, Soviet tanks did the job in Hungary and Czech Much like in the Soviet economy: diversity and quality of goods was much lower than West + Trabant: disadvantages of centralized planning but also looked at with derisive affection – a symbol of the failed East Germany and fall of communism Many reforms were tried in some Communist countries Hungary: Janos Kadar introduces the “New Economic Mechanism” – however, irreconcilable with control of the state and poor incentives (radical half-measures) Yugoslavia: efficient market socialism – due to Marshall Tito – Tito’s reforms + More decentralized planning + Private banks + Halted collectivized agriculture What allowed Tito to get away with this was his political independence of Moscow control Nicolae Ceaucescu – ran totalitarian dictatorship from 1965-89 in Romania + Overthrown and executed – hailed as a reformist but stuck to Stalinist ideology, wanted to pay of all debt so increased exports and decreased imports + Living standards and rationing of necessities Elsewhere, reforms were slow, half hearted and resisted by many Income gap and inequality of living standards between E and W becomes clear Communism too rigid and too weak Fall and collapse of Communism: 1980s WEEK 7: WORLD WAR TWO  Nazis abandoned Benthamite views of government and focused on individualist utility maximization  Drove nationalism to its logical extreme – placed an aggregate term for policies that supported the social welfare function of Germans (or “Aryans”)  WWII and Nazi Germany shows the power or “leverage” a small set of individuals actually have on tens of millions of people One big difference between 1914 and 1939 + Most countries started out in the War in less than full employment so resources used were negligible – low opportunity cost + No longer true for Germany in 1936 (full employment – miracle) and had never been true for the SU, but it held for the Western democratic nations Resources and War + Resource constrains “stretched” – more hours, include people not labor force + Consumption falls and savings increases – cons goods unavailable or rationed by planned economy – freed resources for the war + PPF = elastic band (stretches out and produces beyond its capability) + PPF diagram: A to B to C – B is full employment + But there are resources for “emergency measures”, calling upon people who usually wouldn’t be in the workforce (pensioners, married women, students), asking them to work harder, persuading more effort and consume less, impose rationing and place “command” + German consumption fell – per head Outcome of War: more than ever determined by resource asymmetries How Industrial Muscle Won the War + USSR ALONE outproduced Germany in every class Ability to mobilize resources – willingness Not only size and amount of resources mattered but also the willingness and ability – economic development of countries mattered a lot not only because of technological capability / sophistication and the fact that they were more industrialized but because governments had the apparatus to know where exactly to deploy these resources (where most needed) and how to motivate people to their cause as just “morale” The German War Machine + German not in maximum effort position and full war mode in 1941 + But by 1942… Speer employed. PLACED ECONOMY ON A WAR BASIS + Turned economy into full command economy – read more + Brought women, students, pensioners into the labor force + German tanks >2x in production, 80% planes and submarine time falls But… Germany had no chance of winning – why? 1. Political system – Speer had to fight against other rivals, reforms sabotaged 2. Allied bombings – led production to be in smaller premises (hurt economies of scale) – underground a. Also hurt standardization But above all, Germany was not command enough or “capitalist” enough – not command enough to do what the Soviets could do and not free market/capitalist enough to recruit mega-industrial firms in the US such as GM, Ford, and Bechtel What role did technology play in WWII? 1. American system of mass production based on: interchangeability, continuous flow parts, standardization… 2. German and Japanese “crafts” production a. Not enough quantity, highly skilled labor b. Too non-standardized for maintenance and repair c. Germans realized the importance of standardization and mass production – too late i. 1942  American weapons low quality but mass production and scale  German and Japanese higher quality, better weapons but low quantity and not standardized enough - Germans spent a lot of money on higher skilled technology and sophisticated weaponry – but in the end, ineffective and too expensive o Also didn’t have resources like fuel, ammunition, spare parts, and other essential resources on the battlefield o Shortage of fuel ammunition spare parts essentials on battlefield - Spent a lot of money on ideological “programs” and diverted resources away from certain technologies due to ideological reasons (ie. nuclear) - Brain drain, scientists forced to flee or expelled, reluctance to compromise anti-Jewish ideology Did WWII stimulate technological progress? Did it have “spillover effects”? ++ At first blush, v. impressive: DDT, nuclear, ammunition, tanks, radar, propulsion ++ But most of these at second glance would have come about anyway – war operates as a FOCUSING DEVICE – perhaps accelerated their development somewhat (but at a tremendous cost) War was enormously traumatic and utterly disastrous Difference between Russia in WWI and WWII + Russia in 1914 far different from Soviet Union in 1941 – far more industrialized and advanced + Had already been set up as a command economy – didn’t have to go through the transition – vastly better procurement system than any other country + Even though Germans advanced quickly in 1941 and took their agricultural and industrial regions, industrial production and development overwhelmed G  DUE TO Russian ability to produce enormous amounts of hardware with West help  Came at a large price for consumption – 5 year plans had already caused damage to agricultural and consumer sectors, were already weak, and German allies seized large parts of the SU and caused USSR to lose control of 2/3 of their textile industries and 60% of farming and food processing. As a result, living standards collapsed In actuality things were even worse than that: 25 million homeless refugees, Leningrad besieged for 2 years, even areas not occupied by Germans suffered from lack of draft power, dilution of L- force by students and pensioners not prime-age males, rationing – inadequate portions. Rationining was ubiquitious in Russia during the wars – inadequate rationing leads to system of barter, black markets, etc. Perhaps most important: morale Nationalistic sentiments united the population Soviet population mobilized in an unprecedented way to fight the invaders Germans helped this with their barbaric treatment of the Russian population LR ECONOMIC EFFECT OF WAR ON THE SOVIET UNION + Damaging effects and negative shock – take time to wear off + Persistence: defense industry emerged from war with tremendous prestige + Created a long-term “institutional hysteresis” effect that led to growing militarization of economy + Post-war “industrial military complex” – dominates USSR politically – heavy peacetime defense burden + Military and defense sectors controlled best and most productive resources + No criticism until 1980s Moreover, … 1. One size fits all production instead of flexible production: consumer markets a. Centralized production system led to mass scale, top- down effort – decisions passed down from above based on national policy of one-size-fits-all production (not flexible production for consumer markets) 2. Idea of “central planning” based on 5-year plans but always resisted; after war there is less resistance a. Resistance weakened after the war vs. high resistance in 1930s to 5-year plans and all-powerful command economy Difference in the aftermath between WWII and WWI + Unlike 1918, the allies took… Germans not all bad, just Nazis + More importantly, believed that Germany and Italy and Japan should be reconstructed + Initially not the view that was adopted – Morgenthau plan – pastoralization Why the 180 degrees turnaround? + The allies learned a lesson from 1918/19 – European revanchism and US isolationism + Clearly, what made the difference was the cold war and the fear of the SU getting stronger with the need to build a much stronger Europe + Allies feared that bad economic conditions would make Communism stronger In 1945… (After WWII) 1. Much of Europe is devastated, not just Germany – read aftermath of WWII on Germany and SU a. Occupation and pillaging taken a toll on many countries b. Housing and malnutrition c. Production and infrastructure facilities destroyed d. Scarcity and rationing e. Housing shortages 2. Germany divided into 4 “zones”: industrial disarmament” (closing plants) 3. Refugees: ethnic cleansing in Eastern Europe, mostly of Volksdeutsche a. Many millions of stateless and homeless refugees – 12 M Germany Marshall Plan + US provides payouts / aid to all Western European countries affected by WWII + $12.8 B = 718 B today + Russians and US could not agree on the terms of the aid and Soviet bloc rejects Marshall aid – so it goes to Western European countries although initially for all Europe + Eastern Europe too - The institutional forms that the ECA took were diverse o OEEC  OECD was in charge of coordinating the aid to Europe o Aid was so important because European nations had no hard currency to purchase goods from US  used Marshall aid to import goods from the US (good for US employment as well) o 27% raw materials and semi-finished manufacturing, 25% food, feed and fertilizer, 15% to machines, vehicles and equipment, 13% on fuel What the Marshall Plan did: - Marshall fund also advanced money to government (under condition that… lent manufacturing) - Yet (and inconsistently!) they did not lift the limitations on coal and steel production until 1951 when the Marshall plan ended and W Germany joined ECSC - Engineers and skilled workers were sent to the US to gain training in using advanced techniques of engineering and production Effects of Marshall Plan: Between 1948-1951, growth exceeded prewar period, agriculture higher than prewar, industrial output increased a lot (35% in 3 years), budding prosperity and economic growth Scarcity and rationing disappeared everywhere in W Europe Of course, it is not clear to what extent the Marshall Plan caused it Equally important Economic recovery paved the way for western free-market democracies to avoid Communist threats and led to increased integration in Europe + Culminated in ECSC and other agreements Facilitated growth of free trade, with a new international monetary system at Bretton Woods What was Bretton Woods? Conference with 44 allied nations in NH in 1944 Main function was to establish and international monetary system to replace the GoldStandard Believed that fluctuating exchange rate was too unstable (dropping gold unwise) How did the Bretton Woods system differ from the GS? 4 key differences: 1. Exchange rate pegged but adjustable in case of fundamental disequilibrium 2. Gold played A MINIMAL ROLE 3. Severe controls imposed on international capital flows 4. IMF WAS CREATED to… BOP financing Bretton Woods differed from the GS IN A PROFOUND WAY 1. In GS, Domestic adjustment (expansionary monetary and fiscal policy) subordinated to BOP adjusmments (external balance) a. In BRETTON WOODS, price stability and full employment domestic considerations come FIRST b. BOP adjustment less critical, not a target of economic policy c. Monetary policy used to stabilize prices and bolster economic growth and employment, not protect the currency 2. Protection achieved by exchange controls applied to current account transactions; after that, only capital account transactions controlled In this system, gold still played a (much reduced) role + US tied to gold until 1971, other nations tied to $ + Keynes wanted to create a new reserve currency called the bancor but others rejected this idea, making the US dollar the reserve currency + Americans and White objected + Other countries peg their currency to the $ and once convertibility restored, they would buy and sell US $ to keep market exchange rates within 1% Thus dollar took over the role that gold had played in the IMS before WWII under Gold Standard However, the equilibrating mechanism was very different + The rate at which other nations pegged their currency could be changed when revalued or devalued + This made the dollar into the de facto currency under which every currency was denominated; and countries could undervalue their currency in light of BOP deficits (happened in 1950s and 60s) Bretton Woods also helped set up international organizations that helped lubricate GLOBAL K-markets + IMF and IBRD (later World Bank) + Provided ST and LT (development) loans for countries + IMF = keeper of rules and main instrument of public international management + IMF approval necessary on changes to the exchange rate more than 10% + Advised countries on policies affecting the monetary system + The organization's objectives stated in the Articles of  Agreement are: to promote international monetary  cooperation, international trade, high employment, exchange­rate  stability, sustainable economic growth, and making resources  available to member countries in financial difficulty. Europe’s recovery + Depended on flow of hard currency into international reserve- constrained countries – they needed the hard currency / money to import goods from US + Between the Marshall plan and loans extended by international financial organizations, Western European countries began rebuilding their damaged infrastructure and facilities landscape Finally, the free world committed to free trade + GATT IN 1947 To summarize: A large chunk of the prosperity in the post WWII West was due to better international cooperation, a more efficient international financial system, and lower tariffs. 1920s and 30s mistakes were not repeated Higher trade led to greater cooperation and the culmination of more agreements to the EU – growing level of cooperation within the European community Yet the system was far from perfect: 1. It used capital account restrictions to maintain BOP equilibrium 2. Which were incompatible with ideas of international free trade 3. As the controls on goods and services were eliminated, those that kept track of capital accounts were in force until much later  Bretton Woods system allowed for devaluations but nations resorted to this infrequently because it showed a loss of prestige  Some are surprised that the system lasted as long as it did until 1971; because of close cooperation between governments and between central banks that met once a month in Basel and coordinated monetary economic policies In the 1960s, however, the US lost its perceived leadership position  Vietnam War o Ran deficits, inflation  Grew slower than many countries it defeated such as German + Japan  Many countries sell dollars and start buying Guilds and Marks – Dutch and Germans let currency float ‘up’  Then some countries announced extensive gold purchases with their $  Gold window closed  End of Bretton Woods agreement  In a wave of “hot money” speculation, US forced to suspend its currency convertibility to gold o Two-tier gold market established which finally culminated in suspension of dollar convertibility  Too many dollars; US cannot convert the excessive supply of dollars to gold o US did not have the ability to convert so many dollars into gold: unlimited dollars and limited gold  To supply global liquidity, the US must run a deficit. But to  maintain credibility, the US must not run a deficit. That was the  fundamental dilemma. In the end, the US opted to run a BOP  deficit, which led to the loss of credibility and the collapse of the  Bretton Woods system.  US currency devalued and suspension of dollar convertibility WEEK 8: POSTWAR GROWTH AND THE RISE OF THE EUROPEAN WELFARE STATE + AFTER 1945, Western Europe: TRENTE GLOURIEUSES + vast expansion of the “welfare state” until 1980s  30 “golden years” after 1950  For the purposes of economic / productivity growth, more important to adapt, absorb, and exploit new best-practice techniques rather than develop them  Europeans had retained the capacity to absorb best-practice technology, only 1914-50 disruptions prevented this  Europeans could secure gains from TFP productivity growth just by adopting technology; once the distance between average and best practices converged, growth slowed down What economic processes were going on? 1. Technological competence and diffusion 2. Capital accumulation 3. Good institutions (in a sense to be defined) (Rapid capital accumulation) 4. Open-ness Let’s look into these further… 1. Technological leadership and competence + Difference between developing technology (innovation, pushing the frontier) and absorbing existing technology (diffusion) + In a world where there are very good IPR’s, advantage of innovating because you charge royalties + Other advantages of innovating and being a technological leader even without patents: first-mover advantage, complementarities between the skills needed for development and the skills needed for adoption + If whole world shares “global pool of knowledge”, huge advantage for those who haven’t invested in the knowledge provided knowledge is non-proprietary + By this logic, very few would invest in R&D – too few incentives if everyone is using the knowledge – that is why we need international IPR’s + Europe was great at converting from leader to follower after 1945 In addition to American technology… + Europe copied American systems of mass production: continuous flow processes, interchangeability, large batches, Taylorist labor- management (time-and-motion studies) – adoption + Major element in economic growth (Crafts and Toniolo) + An example is the automobile industry in which Europeans produced their own cars (VW) in addition to American-inspired ones. Ford and GM had large plants (Britain, France) 2. Capital Accumulation + Second factor in European growth that led to substantial growth was the rate of investment + High net fixed capital stock (excluding residential housing) accelerated a great deal between 1950-1973 + Played a major role in growth: 1/3 - ½ of GDP growth attributed to K-accumulation + Explained by: rising marginal product of K coupled with higher savings and more efficient channeling of savings to investment projects Why was the marginal product of K so high in the West? Read “Wage Moderation” story: explains rapid capital accumulation spurred by high corporate profits that led to massive reinvestment in fixed capital ~ Labor surplus and slow wage rise spurs profits that lead to investment (moderate growth in real wages  higher profit  investment) ~ Higher profits reinvested in fixed capital; L productivity rose faster than real wages, leading to an increase in net profitability One cause for slow wage growth: the “Historical Compromise” Workers – agreed to moderate wage growth – higher benefits in the future Employers – agreed to restrain dividends and reinvest higher profits in industry Government – agreed to give taxpayer funded welfare benefits to employers + Keep employment high, give benefits to employers equivalent to wage Institutions: the logic of collective action and the historical compromise + Governments, national organizations, and institutions made free- riding difficult – in force + Nation-wide collective bargaining agreements negotiated lower wages; took into account effect of lower wages on investment, indirect effect of wages in future + Government held the right to wage freezes if any party reneged “Wage Moderation” story: explains rapid capital accumulation spurred by high  profits that led to massive reinvestment in fixed capital o At high corporate profits  profits are driven by the fact that labour  were cheap, so leftover profits can go to labourers or capitalists  (owners) – they reinvested the profits back into the firm and in the end, whole economy grows.   How long will workers keep faith that their employers aren’t cheating on their  deal? Or at what point will both sides stop trusting the government who were  orchestrating the government? o In the 1970s, this historical compromise starts to unravel. What you  see is: rising wages and more strikes, whole thing starts to fall apart. o In many countries, national unions, governments or other  “encompassing organizations” made free­riding on this implicit  agreement much more difficult and hence it remained in force.  o Wages were increasingly negotiated by nation­wide collective  bargaining agreements, which took into account the effect of lower  wages on investment and indirectly on wages in the future.  o At the same time, governments retained the option of engaging in  incomes policy (wage freezes) to enforce the contract if one 


Buy Material

Are you sure you want to buy this material for

50 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Anthony Lee UC Santa Barbara

"I bought an awesome study guide, which helped me get an A in my Math 34B class this quarter!"

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.