Finance and Growth under Neo-liberalism

The post-World War II years had seen systematic intervention by the state to stabilise capitalist eco­nomies. In fact, state intervention had played the same role in that period that incursions into colonial and semi-colonial markets had played over much of the 19th century, right until World War I. This role consisted in ensuring that one component of aggregate ­demand, whether exports to such markets or the state ­exp­enditure, kept growing even when there was a downswing in the level of activity in the capitalist economy. One component of aggregate demand—which det­ermined the level of activity, but was ­independent of the ­level of ­activity—constituted what one may call an “exogenous stimulus” and prevented the ­system from settling down at a ­stationary state or a state of simple rep­roduction where it would otherwise have converged.¹

The post-war state intervention did not just stabilise capitalism in the sense of providing an exogenous stimulus for growth, it also ensured that the system functioned at a level of activity that was close to “full employment.” The state took active countercyclical measures by stepped up its expenditure (or enacted tax cuts) whenever the economy started slipping into a recession, and thereby prevented any serious downturn. The maintenance of a high level of activity encouraged private investment, caused a high rate of growth of the gross domestic product (GDP) and hence a high rate of labour productivity growth. The latter, because of the high employment rate that strengthened the bargaining power of the workers, also led to an impressive rate of growth of real wages. Not surprisingly the period of the 1950s, 1960s and the early 1970s has been called the “golden age of capitalism.”