Treasure Islands - Nicholas Shaxson [37]
Keynes died in April 1946, less than a year after the Nazis surrendered in Europe. The accolades poured in. “He has given his life for his country, as surely as if he had fallen on the field of battle,” said Lionel Robbins, one of his most potent ideological adversaries. Friedrich Hayek, Robbins’s former pupil who was just then fathering a new free-market ideology to dethrone Keynesianism, called him “the one really great man I ever knew.”
Though Keynes had failed in many ways, many things he advocated were put in place, not least widespread capital controls. And events seem to have proved him right—or at least not wrong. The first two years after the war marked a brief period when U.S. financial interests dominated policymaking, and the restrictive international order was in abeyance. But the disaster that ensued, and the new economic crisis in 1947, discredited the bankers, and from the following year things became more restrictive.
The quarter century that then followed, from around 1949, in which Keynes’s ideas were widely put into place, has become known as the golden age of capitalism: an era of widespread, fast-rising, and relatively untroubled prosperity around the world. As Britain’s prime minister Harold Macmillan put it in 1957, “Most of our people have never had it so good.” From 1950 to 1973, annual growth rates amid widespread capital controls (and extremely high tax rates) averaged 4.0 percent in the United States and 4.6 percent in Europe. Not only that, but as the Cambridge economist Ha-Joon Chang notes, the per capita income of developing countries grew by a full 3.0 percent21 per year in the 1960s and 1970s, significantly faster than the record since then. And from the 1970s, as capital controls were progressively relaxed around the world, and as tax rates fell and the offshore system really began to flower, growth rates fell sharply. The countries that have grown most rapidly, the top-ranking economists Arvind Subramanian and Dani Rodrik explained in 2008, “have been those that rely least on capital inflows . . . financial globalisation has not generated increased investment or higher growth in emerging markets.”22
Average growth is one thing, but to get an idea of how well most people are doing, you need to look at inequality, too. In the offshore era from the 1970s onward, inequality has exploded in country after country. According to the U.S. federal Bureau of Labor Statistics, the average American nonsupervisory worker was actually receiving a lower hourly wage in 2006, adjusted for inflation, than in 1970. Meanwhile, the pay of American CEOs rose from less than thirty to almost three hundred times the average worker’s wage. Nor is this just a story about growth and inequality. Another famous study found that between 1940 and 1971, a period mostly covering the time of the golden age, developing countries suffered no banking crises and only sixteen currency crises, whereas in the quarter century after 1973 there were 17 banking crises and 57 currency crises. A major new study in 2009 by the economists Carmen Reinhardt and Kenneth Rogoff, looking back over eight hundred years of economic history, concluded that, as reviewer Martin Wolf put it, “Financial liberalisation and financial crises go together like a horse and carriage.”23
We cannot infer too much from these very different episodes. Other reasons exist for the high growth rates during the golden age, not least postwar rebuilding and productivity improvements during the war. The 1970s oil shocks go some way toward explaining the subsequent slide into crisis and stagnation.
Still, less drastic but