Innovation, Keynesian economics, and the Bretton Woods system in global economics

¶ … innovation was most important for the new global economic system?

The New Global Economic System

The emergence of the new global economic system was due to the advancements of the Industrial Revolution. The major contributor was the increasing price of timber, which forced the search for alternative solutions. This is how the steam-power was introduced, and it "permitted sustained, long-term economic growth for the first time in history; revolutionized the technology of long distance transport; changed the economic and social structure; and led to the eventual transformation of the domestic and global economy, society and institutions" (Adelman). Numerous steps were then taken to create the economic system we know today, and these include the Keynesian economics, the Bretton Woods agreements as well as the GATT policies.

A major development was that of increased cooperation between the countries in the old and new continent. Operations of international trade became more and more common and numerous economists promoted beneficial theories. Such a theory was promoted by David Ricardo and entitled the Theory of Comparative Advantages. It stated that countries are to manufacture and export those products for which they possess a comparative advantage, such as better skilled workforce or more natural resources. Then, they should trade these items onto the international market, and in exchange for them, get other products, which they find it more difficult to produce, given the characteristics of the country. This theory now stands at the basis of international trade and the new global economic system.

Another major aspect in the economic system was the role of the public and private sectors. While some economists and thinkers promoted the idea of a free market (Adam Smith, David Ricardo or John Stuart Mill), in which no state intervention was desired and prices would be established on the market through offer and demand, others (Jean Baptiste Colbert or the physiocrats) militated for a protectionist policy.

The Keynesian economics were implemented onto a mixed context, in which the opinions on liberalization and state intervention were divided. They stated that the government should step aside and let the market establish its rules based on demand and offer, otherwise said, based on earnings and spendings. However, the Keynesians argued that economic crisis occurs when the populations stops spending, and it is now that the government should interfere and ensure a continuous circulation of goods and capitals in order to reduce the crisis (Wise Geek, 2003-2008). In other words, the Keynesian economics were implemented on the belief that low levels of consumptions generate the economic crisis, and that "a fall in national income, lack of demand for goods, and rising unemployment should be countered by increased government expenditure to stimulate the economy" (the Free Dictionary by Farlex, 2008).

Not long after John Maynard Keynes stated his principles, the allied states signed the monetary agreement at Bretton Woods. The new system was basically centered on creating international price stability, which contradicted the ideas of Keynes and his growth theories. He stated that the international stability would eventually be reached through trade, but his beliefs were not shared by the major participant and the largest creditor of the time, the United States of America. To reach the objective of global stability, two institutions were formed to coordinate and supervise financial operations: The International Bank for Reconstruction and Development and the International Monetary Fund. Also, they implemented "a system of fixed exchange rates with the U.S. dollar as the key currency" (Dammasch).