Inside Story

What went right in the twentieth century

Why haven’t we learned more from the West’s golden age, the long postwar boom?

John Quiggin 23 March 2021 1010 words

Michael Harrington’s landmark book, The Other America, created a new push to deal with persistent poverty. Fred W. McDarrah/Getty Images

Most societies have a shared story of a “golden age,” a mythical time when men and women lived simply and happily, free from the cares and troubles that afflict them today. The myth also describes how, through foolishness or malice, the golden age was lost. In Western versions, the blame has been placed on women — Eve for picking the forbidden apple, Pandora for opening the box.

In the developed world, one historical episode might reasonably be regarded as a golden age. Between 1945 and 1973, countries in Western Europe, North America and Oceania experienced strong economic growth combined with very low unemployment and sharply declining inequality. The dominant policies used Keynesian macroeconomics to stabilise the economy and develop a fairly comprehensive welfare state to protect citizens from falling into poverty due to old age, incapacity or unemployment.

Those Keynesian policies produced, or at least coincided with, the longest period of widely shared prosperity in the history of the developed world. Not only was economic growth consistently strong and unemployment low, but income distribution was equalised to a degree not seen before or since. At the time, this “Great Compression” was seen as part of the natural evolution of a capitalist economy; in retrospect, it is quite exceptional.

Whereas unemployment rates during the Great Depression had risen to levels of 30 per cent or more, the golden age was characterised by nearly continuous full employment. In Australia, unemployment was below 1.5 per cent, on average, and exceeded 2 per cent only once.

With the women who had entered the workforce during the second world war having been encouraged to make way for returning servicemen, the benefits of the buoyant economy initially flowed mainly to male workers and their households. But by the end of the golden age, most of the formal gender inequality in the labour market had been swept away. The bar on employing married women in the Commonwealth public service was abolished in 1966. Equal pay for men and women doing the same work was achieved in 1972.

We might have expected this exceptional period to be the focus of intense study. How were its best features achieved? What went wrong? How, if at all, can we create a new golden age? Strangely, these questions have received remarkably little attention.

At the time, the Keynesian economists whose ideas were dominant during the golden age believed the sustained high employment was easily explained. The correct application of Keynes’s views had replaced failed policies based on the fallacious ideas of classical economists.

The same explanation applied to other aspects of postwar prosperity. Modern technology gave developed societies the capacity to meet everyone’s essential needs. Mass poverty had largely been eliminated. In the United States, Michael Harrington’s landmark book, The Other America: Poverty in the United States (1962), brought public attention to the fact that poverty still persisted and created a new drive to deal with it. But, as his title indicated, poverty was seen as a deplorable exception to general prosperity.

Harrington’s work had some lasting consequences in Australia. It led to the creation of the Henderson poverty inquiry in 1972, which encouraged the Whitlam government’s significant extension of the welfare state. Henderson’s “poverty line” is still regularly updated, and has been given new urgency by debates over the proposal for a universal basic income, most recently advocated in Ross Garnaut’s new book, Reset.

At the peak of the golden age in the 1960s, there seemed no reason why poverty and economic want could not be eliminated once and for all. President Lyndon Johnson’s War on Poverty was an expression of a faith that was shared by the Whitlam government in Australia, though it had the misfortune to be elected just as the economic crisis of the 1970s brought the golden age to an end.

Like the disappearance of mass poverty, the decline in economic inequality during the golden age wasn’t seen to require much in the way of explanation. In the 1950s, Simon Kuznets, the American economist who played a central role in developing national accounting, observed that economic inequality, after rising in the early stages of industrialisation, had fallen in the United States and other developed countries, reaching unprecedentedly low levels by the middle of the twentieth century.

Kuznets suggested that the process might be explained by the transfer of the workforce from a low-wage agricultural sector to a high-wage industrial sector. But most commentary was keener to celebrate (or occasionally deplore) the rise of a “middle-class society” than to explain it.

When the Keynesian social-democratic model ran into trouble in the early 1970s, most attention was focused on the inflation that emerged in the late 1960s. Milton Friedman and other resurgent supporters of classical economics proposed policies that would reduce inflation and — after a period of painful but necessary adjustment — lay the basis for a return to sustained prosperity.

For a while, during the economic expansion of the 1990s, it seemed possible that this promise might be met. Only after 2000 did it become clear that the neoliberal economy offered nothing like the broad-based prosperity of the postwar era. The global financial crisis, and the ensuing years of austerity have made this clear to nearly everyone.

But the golden age was already ancient history for an economics profession in which the mastery of the latest theoretical tools is valued far more highly than any long-term perspective. Most economists, to the extent that they considered the issue at all, were content with simplistic explanations of the golden age as, for example, a straightforward result of the economic activity generated by postwar reconstruction.

This isn’t the place to attempt a detailed explanation of the golden age. But it’s a reminder that we shouldn’t be satisfied with a return to the pre-pandemic economy, in which periods of marginally positive growth in real wages, and occasional reversals of the trend towards ever-greater inequality were treated as triumphs. Rather we should be looking harder at what went right in the mid twentieth century and how we can recapture broadly shared prosperity. •