Post-war displacement of Keynesianism

The Post-war displacement of Keynesianism was a series of events which from mostly unobserved beginnings in the late 1940s, had by the early 1980s led to the replacement of Keynesian economics

Keynesian economics

Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

as the leading theoretical influence on economic life in the developed world. Similarly, the allied discipline known as Development economics

Development economics

Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...

was largely displaced as the guiding influence on economic policies adopted by developing nations.

The displacement of Keynesian thinking was driven by those who leaned towards purer free market

Free market

A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

policies rather than the mixed economy

Mixed economy

Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...

which require a significant role for government intervention. Their motivations included a dislike of large governments which they saw as prone to interfere excessively in the lives of their citizens; an intellectual preference for Classical

Classical economics

Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

or Neoclassical economics

Neoclassical economics

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

and related schools; or in some cases a belief that their individual interests were best served by promoting a limited role for government. Efforts against Keynesianism took place on three fronts – in the academic world, in politics, and in the wider world of business and public opinion.

Background

Starting in 1936 with the publication of his General Theory, the Keynesian revolution

Keynesian Revolution

The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....

in economic thinking had by the end of the 1940s elevated John Maynard Keynes's ideas to an ascendant position in main stream economics. During the Golden Age of Capitalism of the 1950s and 1960s, governments of the United States , Great Britain and many other countries adopted Keynesian principles, where moderate government intervention was believed by Keynesians to deliver higher levels of employment and prosperity than would be possible from the unaided free market.

In the academic sphere, Keynes position as the principal authority was largely confined to the Anglo Saxon world - elsewhere Keynes was influential but not as central. This is partly as neo classical economics, the system of thought which Keynes launched his revolution against, had never been as established beyond the English speaking nations in the first place - instead there was often a tradition of using mixed economy models such as the French dirigiste

Dirigisme

Dirigisme is an economy in which the government exerts strong directive influence. While the term has occasionally been applied to centrally planned economies, where the state effectively controls both production and allocation of resources , it originally had neither of these meanings when...

system. While a critic of Keynes, the economic journalist Henry Hazlitt

Henry Hazlitt

Henry Stuart Hazlitt was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times...

was to write in 1959:
Similarly, the economic policies adopted in the developing world were largely based on Development economics – although that branch of economics is usually regarded as distinct from Keynesianism, it is also a mixed economy model with many of its principles based on Keynes's work. In the early years after WWII the US was highly supportive of development economics as they believed it would help accelerate the roll back of imperialism, inhibit the spread of communism and swiftly help under developed nations to become prosperous capitalist economies; so they heavily funded its promotion by United Nations

United Nations

The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

programs. The only significant parts of the world that had rejected Keynesian principles was the communist nations which used the command economy model.

In the 1960s forces emerged that by the mid 80s would end the accendency of Keyne's ideas. For Keynes's biographer Lord Skidelsky these can be divided into practical and intellectual dimensions; they are inter-related but in a complex and indirect way.
The failure of what were at the time perceived to be Keynesian economics to halt the stagflation

Stagflation

In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

of the 1970s lent credibility both to academic and popular attacks on Keyne’s ideas. Some even argued that the poor economic performance were due to Keynesian economics. The latter view has been roundly rejected by post keynesians

Post-Keynesian economics

Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...

, who suggest the inflation following the Vietnam war was due to the decision not to pay for the war with tax rises, against Keynesian advice.

Economic historians have labelled the period from about 1951 - 1973 as the Age of Keynes or more commonly the Golden Age of Capitalism due to its relatively high average global growth, low unemployment, reduction of inequality, lowering of public debt and very low incidence of financial crises. After the transition period of the 1970s, the period that spanned from about 1980 - 2009 has been labelled the Washington consensus

Washington Consensus

The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

era.

Think tanks and the counter Keynesian revolution in academic economics

As early as 1947, Friedrich von Hayek had gathered together some 40 intellectuals with free market sympathies to form the Mont Pelerin Society

Mont Pelerin Society

The Mont Pelerin Society is an international organization composed of economists , philosophers, historians, intellectuals, business leaders, and others who favour classical liberalism...

. They were mostly economists but also included journalists , historians and philosophers. Their explicit intention was to nurture intellectual currents that would one day displace Keynesianism and other collectivist influences. Prominent members included Karl Popper

Karl Popper

Sir Karl Raimund Popper, CH FRS FBA was an Austro-British philosopher and a professor at the London School of Economics...

, Austrian School

Austrian School

The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

founder Ludwig von Mises

Ludwig von Mises

Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...

along with the then young Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

. Initially the society had little impact on the wider world - Hayek was to say it was as if Keynes had been raised to sainthood after his death with economists refusing to allow his work to be questioned.
Yet in the decades following its establishment the Mont Pelerin Society came to take a central role within a network of over 100 free market think tanks located all over the world. The think tanks typically enjoyed financial support from commercial interests. Collectively the think tanks won increased acceptance for free market thinking within accademia, within public opinion and among governments. In the US two of the most influential free market think tanks were the Foundation for Economic Education

Foundation for Economic Education

The Foundation for Economic Education is one of the oldest free-market organizations established in the United States to study and advance the freedom philosophy. Murray Rothbard recognizes FEE for creating a "crucial open center" that he credits with launching the movement...

and the
Heritage Foundation

Heritage Foundation

The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...

. In the UK perhaps the two most influential were the Institute of Economic Affairs

Institute of Economic Affairs

The Institute of Economic Affairs , founded in 1955, styles itself the UK's pre-eminent free-market think-tank. Its mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social...

and the Adam Smith Institute

Adam Smith Institute

The Adam Smith Institute, abbreviated to ASI, is a think tank based in the United Kingdom, named after one of the founders of modern economics, Adam Smith. It espouses free market and classical liberal views, in particular by creating radical policy options in the light of public choice theory,...

.

Hayek himself dropped out of mainstream economics in 1950 to work chiefly in political philosophy. Friedman and other allies continued to work as economists, though initially they only had marginal influence on the discipline as a whole.

According to Professor Keith Shaw an important early milestone in Friedman's campaign against Keynesianism was the 1956 publication of Studies in the Quantity Theory of Money.
In this work Friedman restated the Quantity theory of money

Quantity theory of money

In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level....

, and obtained the attention of several Keynesian economists partly because he admitted Keynes was right to state the velocity of circulation of money in the Equation of exchange

Equation of exchange

In economics, the equation of exchange is the relation:M\cdot V = P\cdot Qwhere, for a given period,M\, is the total nominal amount of money in circulation on average in an economy.V\, is the velocity of money, that is the average frequency with which a unit of money is spent.P\, is the price...

can vary, rather than being a contrast as assumed by classical economists. However, Friedman's restatement was otherwise closer to the classical view in reducing the scope for beneficial government intervention in the economy. An even more influential work was his 1963 publication of A Monetary History of the United States. Drawing on extensive empirical data, it further strengthened the case for his restated Quantity theory of Money, arguing that inflation was "always and everywhere a monetary phenomena", while conceding it could take one or two years for an increase in the money supply to lead to inflation. This ran counter to the then orthodox Keynesian interpretation that inflation was linked to employment, as modelled by the Phillips curve

Phillips curve

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation...

which predicted an inverse relationship between the two variables. Governments at the time would use the Phillips curve

Phillips curve

as part of their models to calculate the expected cost in terms of inflation for a stimulus designed to restore full employment. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist , and that it would be possible to have both inflation and unemployment rise at once. Friedman had also argued that workers expectations of future high inflation could lead to an inflationary spiral as they would push for increased wages in advance to try to compensate for expected future inflation.

Friedman's work began to gain increasing acceptance among academics after 1973, when stagflation

Stagflation

In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

- the simultaneous increase in both inflation and unemployment - became prominent, just as he had predicted. While the 1973 oil crisis

1973 oil crisis

The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

was clearly an inflationary shock to the global economy, Friedman was able to argue persuasively that inflation was much higher that it would have been due to the rapid expansion of the money supply by governments in 1971. By the lates 1970s , empirical data was also present to suggest Friedman was right to emphasise the role of expectations on inflation, further increasing the acceptance of his ideas by main stream economists. Post Keynesian economist Paul Davidson

Paul Davidson

Paul Davidson is an American author who is best known for his Words for My Enjoyment blog and his 2006 book The Lost Blogs....

has argued that part of the reason for Friedmans intellectual vicitory was that Keynes's ideas were misunderstood by the main stream academics of the time ( the Neo-Keynesians

Neo-Keynesian Economics

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists , attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics...

) who therefore didn't have a consistent framework to rebut the attacks.

So prominent was Friedman and other Monetarist economists in overturning the Keynesian consensus that the efforts to do so are sometimes referred to as "Milton Friedman's counter revolution." However there were several other key influences. Professor Roger E Backhouse lists the Lucas critique

Lucas critique

The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, argues that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.The basic idea...

which led to the increasing influence of Rational Expectations

Rational expectations

Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...

and Real Business Cycle Theory

Real business cycle theory

Real business cycle theory are a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real shocks. Unlike other leading theories of the business cycle, RBC theory sees recessions and periods of economic growth as the efficient response to...

; Professor Gordon Fletcher identifies the same influences as Backhouse while also adding S H Frankel's attack which was based on the work of Georg Simmel

Georg Simmel

Georg Simmel was a major German sociologist, philosopher, and critic.Simmel was one of the first generation of German sociologists: his neo-Kantian approach laid the foundations for sociological antipositivism, asking 'What is society?' in a direct allusion to Kant's question 'What is nature?',...

along with the influence of the Austrian School and especially Hayek, who enjoyed a resurgence in the 1970s;

Journalist Adam Curtis

Adam Curtis

Adam Curtis is a British BAFTA winning documentarian and a writer, television producer, director and narrator. He works for BBC Current Affairs.-Early life and education:Curtis was born in 1955...

describes how game theory

Game theory

Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

and other ideas arising from the cold war provided additional support for the theories Hayek had articulated in the forties, and helped them gain wider acceptance.

These attacks were so successful that by 1980 Robert Lucas

Robert Lucas, Jr.

Robert Emerson Lucas, Jr. is an American economist at the University of Chicago. He received the Nobel Prize in Economics in 1995 and is consistently indexed among the top 10 economists in the Research Papers in Economics rankings. He is married to economist Nancy Stokey.He received his B.A. in...

was saying economists would often take offence if described as Keynesians.

The ascendancy of financial interests in the real world economy

When the Bretton Woods regime was established in the 1940s, free roaming international capitalists were "caged" to protect the economic interests of ordinary working people. Capital control

Capital control

Capital controls are measures such as transaction taxes and other limits or outright prohibitions, which a nation's government can use to regulate the flows into and out of the country's capital account....

s were installed in all major countries. In Great Britain for example, at one point families were not allowed to take more than £50 abroad for their foreign holidays. Even before the controls were put in place, international transactions were at historically low levels, as financiers and speculators had been weakened or at least made wary by the long depression of the 1930s and the war.

Nevertheless, power slowly began to shift back from public to private interests. The 1970s were a key decade for this process, but Financial innovation had begun to erode the effectiveness of capital controls as early as the late fifties, an example being the Eurodollar market which the US authorities decided not to regulate.

Elliot and Atkinson state 1968 was a pivotal year when power shifted in the favour of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system

Bretton Woods system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

Keynes had helped to architect first began to break down. Further key events were the Nixon Shock

Nixon Shock

The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...

of 1971 when conversion to gold was suspended even for governments, the collapse of the fixed exchange rate system in 1973, and the United states official abandonment of capital controls in 1974.
A common popular view was that the rise of financial power resulted from unplanned trends towards globalisation and technical innovation.
This view has been challenged by scholars such as Eric Helleiner, Louis Pauly

Louis Pauly

Louis W. Pauly is professor of political science and Director of the Centre for International Studies, at the Munk Centre for International Studies, at the University of Toronto. In October 2002, he was awarded a Canada Research Chair.-Biography:...

and Susan Strange

Susan Strange

Susan Strange was a British academic who was influential in the field of International Political Economy. Her most important publications include Casino Capitalism, Mad Money, States and Markets and The Retreat of the State : The Diffusion of Power in the World Economy.For a quarter of a century,...

, who argue that the US and British administrations encouraged financial liberalization even as early as the late 1950s, when mainstream economics was still largely of the opinion that such a policy would be incompatible with the general welfare. Reasons given include a calculation by the US that with the erosion of the hugely favorable trade balance they had enjoyed for the first few years after the war, financial liberation would be a good peaceful way of promoting continued US hegemony as US banks were far more advanced than their competitors in the rival economies of Europe and Japan. Another reason given is that the Financial sector stood to gain hugely from financial liberalization and so vigorously lobbied government to allow it. Whereas the negative impact would be dispersed among all other sectors, with no one sector suffering greatly. So without a champion such as Keynes to stand up for the common good, a classic collective action problem prevented meaningful counter lobbying from occurring.

Changes in public opinion

For most of the first two decades after World War II there was considerable enthusiasm among the public for Keynesian policy, which was seen as a way to avoid the economic chaos of the great depression

Great Depression

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

. In Great Britain for example, the post war election was fought largely on the grounds of the two main party's conflicting economic policies. Clement Attlee

Clement Attlee

Clement Richard Attlee, 1st Earl Attlee, KG, OM, CH, PC, FRS was a British Labour politician who served as the Prime Minister of the United Kingdom from 1945 to 1951, and as the Leader of the Labour Party from 1935 to 1955...

's Labour party espoused Keynesian policies, while Churchill's Conservative party drew considerable inspiration from Hayek and his then recently published The Road to Serfdom

The Road to Serfdom

The Road to Serfdom is a book written by the Austrian-born economist and philosopher Friedrich von Hayek between 1940–1943, in which he "warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning," and in which he argues...

. The public's desire for Keynesian policy has been widely credited for the landside victory

United Kingdom general election, 1945

The United Kingdom general election of 1945 was a general election held on 5 July 1945, with polls in some constituencies delayed until 12 July and in Nelson and Colne until 19 July, due to local wakes weeks. The results were counted and declared on 26 July, due in part to the time it took to...

won by Attlee, despite voter's great esteem for Churchill.
The public was generally in favour of government's efforts to enforce tight controls on private capital as public opinion was strongly against private speculators and financiers. Journalists Larry Elliott

Larry Elliott

Larry Elliott is a British journalist and author focusing on economic issues. He is currently Economics editor at The Guardian, and has published four books on related issues, often in partnership with Dan Atkinson.-Education:Elliott was educated at St...

and Dan Atkinson

Dan Atkinson

Dan Atkinson is a British journalist and author.He has been economics editor of The Mail on Sunday since 2000, before which he was for ten years a financial correspondent with The Guardian, in which role he specialised in issues of regulation and fraud...

say that it is hard for us today to imagine how dimly they were viewed. The disparaging label Gnomes of Zürich

Gnomes of Zürich

Gnomes of Zürich is a disparaging term for Swiss bankers.Swiss bankers are popularly associated with extremely secretive policies, while gnomes in fairy tales live underground, in secret, counting their riches...

were typical of how they were described during this period.

Various events began to erode the public's faith in the goodness of government, gathering force from the mid-fifties. For Britain and her dominion

Dominion

A dominion, often Dominion, refers to one of a group of autonomous polities that were nominally under British sovereignty, constituting the British Empire and British Commonwealth, beginning in the latter part of the 19th century. They have included Canada, Australia, New Zealand, Newfoundland,...

s a key event was the 1956 Suez Crisis

Suez Crisis

The Suez Crisis, also referred to as the Tripartite Aggression, Suez War was an offensive war fought by France, the United Kingdom, and Israel against Egypt beginning on 29 October 1956. Less than a day after Israel invaded Egypt, Britain and France issued a joint ultimatum to Egypt and Israel,...

along with strands of thought in both the counterculture such as the work of R.D. Laing and in mainstream academia such as the thinking of Isaiah Berlin

Isaiah Berlin

Sir Isaiah Berlin OM, FBA was a British social and political theorist, philosopher and historian of ideas of Russian-Jewish origin, regarded as one of the leading thinkers of the twentieth century and a dominant liberal scholar of his generation...

who to varying degrees were cynical of the establishment's claims to want the best for folk, arguing that their true motivation was to advance their private interests or simply the thrill of exerting control. In the United States, Ayn Rand

Ayn Rand

Ayn Rand was a Russian-American novelist, philosopher, playwright, and screenwriter. She is known for her two best-selling novels The Fountainhead and Atlas Shrugged and for developing a philosophical system she called Objectivism....

's popular novel Atlas Shrugged
Atlas Shrugged
Atlas Shrugged is a novel by Ayn Rand, first published in 1957 in the United States. Rand's fourth and last novel, it was also her longest, and the one she considered to be her magnum opus in the realm of fiction writing...

helped generate public enthusiasm for a return to laissez-faire

Laissez-faire

In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....

capitalism - opinion polls have ranked her work as being the second most influential book on Americans after the Holy Bible.

Concerns over the true motivations of public officials were further encouraged by Public choice theory

Public choice theory

In economics, public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science...

. A rudimentary form of this theory was promoted from the early 1960s by James Buchanan

James M. Buchanan

James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...

, at the expense of Keynes's standing both in public opinion and among academics. Journalists Elliot and Atkinson write that by the late sixties the younger generation had grown up with no experience of life before the managed economy, and therefore had no reason to be grateful to it. Instead they were skeptical about the establishment's pretensions of altruism, in some cases hostile to what was perceived as its materialism and in other cases passionate for much more progressive causes. A notable worldwide eruption of these feelings was the Protests of 1968

Protests of 1968

The protests of 1968 consisted of a worldwide series of protests, largely participated in by students and workers.-Background:Background speculations of overall causality vary about the political protests centering on the year 1968. Some argue that protests could be attributed to the social changes...

. In the US, disenchantment at the Vietnam War and what was seen as the failure of Keynesian responses against inflation further contributed to the public's loss of faith in government.
Buchanan and James Wanger's 1977 book Democracy in Deficit: the Political Legacy of Lord Keynes was one of the more effective attacks against remaining pro-Keynes opinion.
A follow up book The Consequences of Mr Keynes (1978) by Buchanan and John Burton, further attacked Keynes for his alleged naivete in believing politicians and bureaucrats are largely motivated by benevolence.
This is not to say the public as a whole became positive about the free market, in the seventies those advocating its principles would still sometimes be pelted with eggs and flour bombs by hostile student audiences. However public opinion in the English speaking world was slowly won over. By the eighties free market institutions were once again widely respected if not widely admired, despite the occasional popular work that tried to bring their dark sides to the public's attention, such as Oliver Stone's

Oliver Stone

William Oliver Stone is an American film director, producer and screenwriter. Stone became well known in the late 1980s and the early 1990s for directing a series of films about the Vietnam War, for which he had previously participated as an infantry soldier. His work frequently focuses on...

film Wall Street and Tom Wolfe's

Tom Wolfe

Thomas Kennerly "Tom" Wolfe, Jr. is a best-selling American author and journalist. He is one of the founders of the New Journalism movement of the 1960s and 1970s.-Early life and education:...

novel The Bonfire of the Vanities
The Bonfire of the Vanities
The Bonfire of the Vanities is a 1987 novel by Tom Wolfe. The story is a drama about ambition, racism, social class, politics, and greed in 1980s New York City and centers on four main characters: WASP bond trader Sherman McCoy, Jewish assistant district attorney Larry Kramer, British expatriate...

.

Changes in government policy

For the Anglo-American economies, Keynesian economics typically was not officially rejected until the late 1970s or early 1980s. Formal rejection was generally preceded by several years by the adoption of monetarist policies aiming to reduce inflation, which tended to counteract any expansionary fiscal policies that continued to be employed until Keynesianism was formally discarded. In Britain Keynesian economics was officially rejected by Margaret Thatcher's

Margaret Thatcher

Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...

new government in 1979, ending the Post-war consensus

Post-war consensus

The post-war consensus is a name given by historians to an era in British political history which lasted from the end of World War II in 1945 to the election of Margaret Thatcher as Prime Minister of the United Kingdom in 1979....

. There had been initially unsuccessful attempts to establish free market favouring policies as early as 1970 by the government of Edward Heath

Edward Heath

Sir Edward Richard George "Ted" Heath, KG, MBE, PC was a British Conservative politician who served as Prime Minister of the United Kingdom and as Leader of the Conservative Party ....

. In 1976 the then Prime Minister James Callaghan

James Callaghan

Leonard James Callaghan, Baron Callaghan of Cardiff, KG, PC , was a British Labour politician, who was Prime Minister of the United Kingdom from 1976 to 1979 and Leader of the Labour Party from 1976 to 1980...

stated that "spending our way out of recession" is no longer an option. According to Skidelsky, Callaghan's statement is widely seen as marking the end of the Keynesian age. In the US it was Reaganomics

Reaganomics

Reaganomics refers to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s, also known as supply-side economics and called trickle-down economics, particularly by critics...

that fully displaced Keynesianism in 1981, again this had been preceded by a significant movement in the direction of monetarism by President Jimmy Carter's

Jimmy Carter

James Earl "Jimmy" Carter, Jr. is an American politician who served as the 39th President of the United States and was the recipient of the 2002 Nobel Peace Prize, the only U.S. President to have received the Prize after leaving office...

1979 appointment of Paul Volcker

Paul Volcker

Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...

as Chairman of the Federal Reserve

Chairman of the Federal Reserve

The Chairman of the Board of Governors of the Federal Reserve System is the head of the central banking system of the United States. Known colloquially as "Chairman of the Fed," or in market circles "Fed Chairman" or "Fed Chief"...

. In Australia and New Zealand the era of Keynesianism was ended by the election victories of prime ministers Bob Hawke

Bob Hawke

Robert James Lee "Bob" Hawke AC GCL was the 23rd Prime Minister of Australia from March 1983 to December 1991 and therefore longest serving Australian Labor Party Prime Minister....

(1983) and Roger Douglas

Roger Douglas

Sir Roger Owen Douglas , is a New Zealand politician who formerly served as a senior New Zealand Labour Party Cabinet minister. He became arguably best-known for his prominent role in the radical economic restructuring undertaken by the Fourth Labour Government during the 1980s...

(1984) respectively , though in both cases Keynesian economics had already fallen partly out of favour.
In Canada the transition was less clearly marked, though Pierre Trudeau

Pierre Trudeau

Joseph Philippe Pierre Yves Elliott Trudeau, , usually known as Pierre Trudeau or Pierre Elliott Trudeau, was the 15th Prime Minister of Canada from April 20, 1968 to June 4, 1979, and again from March 3, 1980 to June 30, 1984.Trudeau began his political career campaigning for socialist ideals,...

had begun to adopt monetarist anti inflationary measures from as early as 1975.

Likewise on continental Europe the transition away from Keynesian economics was less distinct, partly as Keynes had not been as important there, as European states had generally pursued Dirigiste measures even before Keynes, never having embraced classical economics in the first place.

In South American efforts were made to displace development economics as early as the mid fifties, by Milton Friedman's Chicago School

Chicago school

Chicago school may refer to:* Chicago school * Chicago school * Chicago school * Chicago school * Chicago school * Chicago School of Professional Psychology...

with some government support, as it appeared there was a risk that the developmentalist policies could encourage socialism . However despite success in setting up franchises in Latin American universities and educating passionate individual free market economists, the efforts had little political effect. However later events such as the 1973 coup by Augusto Pinochet

Augusto Pinochet

Augusto José Ramón Pinochet Ugarte, more commonly known as Augusto Pinochet , was a Chilean army general and dictator who assumed power in a coup d'état on 11 September 1973...

in Chile

Chile

Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...

brought in governments who strongly favoured free market policies. In other Latin American countries pivotal individual events are much harder to pin down, but a gradual process described by author Duncan Green

Duncan Green

- Previous Employment :Prior to working there he was employed as a Senior Policy Adviser on Trade and Development at the Department for International Development . He was responsible for looking at trade in goods. His post at DFID was originally a secondment from CAFOD. At CAFOD he had been their...

as a "silent revolution" had largely displaced development economics with free market influences by the mid 1980s

In the developing countries of Africa and Asia the mid seventies saw a backlash against the trend towards liberalism by the west, with a group of some 77 developing nations making determined efforts to lobby for a revived Bretton Woods system with strengthened capital controls to protect against adverse movements of private finance. But again commitment to development economics largely faded away and by the mid 1980s the free market agenda was broadly accepted. Exceptions were countries large enough to retain independence and continue to employ mixed economy policies, such as India and China. China employed a command economy model throughout the 1950s and 60s; Economic reforms in China begain in 1978 taking them closer to a mixed economy model, though one based more on pragmatic principles rather than Keynes's ideas. India persisted with a mixed economy model until the early 1990s, when she began to liberalise after her 1991 crisis

1991 India economic crisis

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three...

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Economists and the rise of neo-liberalism Renewal (2009) by Roger Backhouse
Roger Backhouse (economist)
Roger E. Backhouse is Professor of the History and Philosophy of Economics at the University of Birmingham. He is a noted scholar in the history of economics and economic methodology and has published in the economics of Keynes, disequilibrium macroeconomics, and the history of recent social...