185
countries were not moving along
the same lines. Much of Asia was
under communist rule, and the Iron
Curtain now separated Europe into
East and West. This was the era of
the Cold War between the Soviet
bloc and the West. The spread of
communist regimes prompted a
reaction among many economists
in the West, especially those with
experience of their tyranny.Free market revival
Influenced by Austrians such as
Ludwig von Mises (p.147) and
Friedrich Hayek (p.177), the US’s
Chicago School of economists took
a conservative stance against the
prevailing mood of Keynesianism.
They advocated a move back to
a free market system with less
government interference. The roots
of this idea lay in the neoclassicaleconomics of the turn of the 20th
century, which focused its analysis
on supply and demand. Economists
of the Chicago School turned to
science for inspiration. Kenneth
Arrow (p.209) used mathematics to
prove the stability and efficiency of
markets, and Bill Phillips (p.203)
used ideas from physics to describe
the trade-off between inflation and
unemployment. Some Western
economists, such as Maurice Allais
(p.195), introduced ideas from
psychology in the 1950s and 60s.
This inspired new models of
decision making that challenged
the belief in “rational economic man”
first described by Adam Smith.
Huge advances in communication
technologies made the world seem
a smaller place during the post-war
decades, and economists became
more aware than ever before of theinternational nature of economics.
Although the US and Europe still
dominated economic thinking
outside the communist states,
more notice was being taken of
the developing countries, not just
as a source of raw materials but as
economies in their own right.
Globalization continued apace,
and economists began to examine
the reasons for the gap between
rich and poor countries, and how
this could be narrowed. Ideas for
development moved from capital
investment to debt relief, but it
became clear that the problems
were more complex, involving
politics, culture, and economics. At
the same time economists began
increasingly to suggest that perhaps
economic prosperity was not the
only—or even the best—way to
measure a country’s well-being. ■POST-WAR ECONOMICS
1956
1955 1957
1958 1960 1970
1958 1962 1970
Richard Lipsey and
Kelvin Lancaster
suggest that
intervention to correct
a market failure can
make matters worse.The Warsaw Pact
is signed between
seven communist
states in Eastern
Europe and
the Soviet Union.
The European
Economic
Community
(EEC) is founded
by the Treaty
of Rome.Bill Phillips describes
the Phillips curve,
showing the
relationship between
inflation and
unemployment.The Organization
of Petroleum
Exporting
Countries (OPEC)
is founded
in Baghdad.Andre Gunder Frank uses
dependency theory to
argue that the global
economy creates
a division between rich
and poor countries.Mao Zedong starts the
Great Leap Forward,
an attempt to
industrialize China
that leads to a
catastrophic famine.Robert Mundell and
Marcus Fleming
describe the
relationship between
exchange rates
and output.Eugene Fama proposes
the efficient market
hypothesis, suggesting
that investors cannot
consistently beat
the market.