Transcript | 1. lecture: From Great Depression to the global financial and economic crisis - University for modern Slovakia

I want to dedicate today's lecture to a brief description and assessment of path which the world (mainly the developed countries of Western Europe and the USA) went after the Great Depression, especially after World War II. We will look at the issue mainly through the prism of the state's role in the economy.

From an economic point of view the strength and role of state in a country is the best represented by indicator of the proportion of public expenditure to gross domestic product (GDP). This indicator is called the degree of redistribution, because it expresses how much wealth created in the country, the government leaves to people and businesses and how much is taken through taxes to finance public spending. In previous lectures we explained what GDP is and why its value but especially its growth is important.

In countries with lower levels of redistribution state plays a minor role, in countries with higher levels of redistribution in turn state plays a greater role in life of society, businesses and individuals.

This indicator before the crisis in 2008 ranged from levels around 35% in countries like USA, Slovakia, Bulgaria and Romania to over the level of around 43% in Germany and the Czech Republic and to over 50% in countries such as Denmark, Sweden, France, Belgium. During the crisis, but also after it, the degree of redistribution has increased even further, which is given by a decline of GDP growth as well as growth (or at least lower decrease) in public spending.

As it is evident, the rate of taxation is closely related to the degree of redistribution, countries with lower levels of redistribution have lower taxes and vice versa.

If we were to simply describe what happened in the economy in developed countries since the Great Depression (GD) to the present time, it could be summed up in this statement - the role of state in economy significantly increased.

Best of all it is demonstrated by the historical tables. Before GD, in 1927, the rate of redistribution in the U.S. had been 11.2%, in 2008 it was 36.9%. In the UK, this number has increased over the same period from 29.5% to 47.5%.

What were the reasons for such development? The most important were three - the victory of communism in Russia, world wars and their consequences, and the victory of Keynesian economic doctrine in practical politics of the Great Depression.

In 1917, the Communists gained power in Russia by force and began to build socialism. According to the official propaganda it was fair society built on the abolition of exploitation and equality of all people. In fact, it was a denial of freedom in the political and economic fields. All property was nationalized; competition and market were banned; political parties except of the Communist outlawed. Although it was a criminal regime whose death toll in the Soviet Union itself is estimated at 20 million (and in the world around one hundred million), not insignificant part of world public considered it was fair and attractive. How was this possible? There was no internet or free travel to communist countries, Soviet propaganda worked in full swing, also their role played confused, but often bought by the Soviets, leftist intellectuals.

World wars also played an important role in increasing state influence in economy and society. State of war which caught almost all the developed countries of the world twice in quick succession called for increasing the role of the state. Mobilization, war production, limiting freedom of enterprise, increasing taxes, these were the necessary measures. The war, however, meant the huge cost, growth of public debt, and therefore problems with taxes and the return of redistribution to normal levels thereafter.

Finally, GD and the triumphant emergence of Keynesian economic policies that dominated the economic policies of developed countries for the next fifty years with the break between 1980 and 2010 came back today, especially in USA.

GD was a crisis never seen before. In the USA between 1929 - 1933 industrial production decreased by 46.8%, unemployment reached 25%, 40% of banks went bankrupt. The crisis also affected Europe with a similar power. The global economy had not recovered completely from the crisis until the Second World War, although the deepest bottom was reached in 1933. In this situation, John Maynard Keynes in 1936 published his work "The General Theory of Employment, Interest and Money." In it he presented a theoretical justification for the needs of active government intervention through fiscal and monetary policy. He emphasized the need for active government policy and greater state intervention into the economy. He considered inadequate aggregate demand to be the cause of the crises, which he proposed to increase by maintaining low interest rates and fiscal incentives, as the higher deficits and financing of public investments, public works, and the like.

Keynesian economic theory had become undoubtedly the most influential economic school of the twentieth century and greatly influenced the increase in the state's role in the economy. The influence of this school, however, lasts to the present time, what is best illustrated by the fact that the U.S. Federal Reserve and the U.S. government during the global financial crisis, behaved exactly according to this theory.

Factors described above (the expansion of communism, wars and the advent of Keynesianism) led after World War II to increase of the state's role in almost all developed countries, although to a lesser extent in the U.S. than in Europe. The expansion of communism in Central and Eastern Europe and China, accelerated and deepened these trends. The welfare state had begun to be promoted, which is a concept of active state intervention into the national economy and social life of society to ensure the general welfare.

Large companies, especially energy companies, were nationalized in many countries and the state took an increasing role in social security, pension system and health care. Welfare state is also called the nursing state. To provide all these services, the state needed means which were gained mainly by raising taxes, but also by increasing debt - explicit, but also implicit. This system worked quite successfully in Europe for decades mainly because the global competition rate was much lower than today. As we explained in the first trimester lectures, new era of globalization with a strong increase in global competition occurred at the beginning of the nineties, thanks to the fall of communism and the development of the Internet. At the end of the seventies, however, the expansion of the welfare state in many countries hampered to its limits and the growth had to be partially changed. Changes followed decreasing the influence of the state and redistribution (Thatcher in Britain, Reagan in the U.S.), or at least partial reforms of welfare systems to minimize the misuse of the system (Sweden, Denmark). There were, however, no major changes, welfare state had survived, as evidenced by the fact that the rate of redistribution, although partially reduced in many countries, but usually only temporarily, as shown by the data in the table below.

And then came the 2008 global financial crisis and after the global economic crisis. They are indeed more or less behind us, but we have a new crisis - debt. We will talk about it in the next lecture in a week.