The Great Depression is an event that affected not only America but many countries throughout the world. I remember stories my grandmother would tell of the life she lived during the Great Depression. Up till the 1930's economist relied heavily on classic economics. Classic economics is described by Hall, R and Taylor, J (1993 p.22) as analysis of long-run growth with an emphasis on flexible prices. The classic theory of economics believed that in the long-run the economy and employment would self-correct in time. The classic theory of economics further explained that time would take care of a natural level of employment. To further understand classic economics, one must first define the long-run. Boyes, W and Melvin, M (2005 p.G-4) define …show more content…
With no time limit on the long-run Keynes believed there should be interventions to aid in the movement of demand to help the economy. Many may not survive the "long-run" without a set time for things to change. Compared to the classic theory, Keynes believed prices and wages were "sticky" and would not respond as rapid as thought with the classic model. (Rittenberg, L and Tregarthen, T. (2012) p. 1131) Keynes saw the supply curve as a near horizontal curve and that the demand would move along with curve based on the economy with little to no sudden change in price or wages. Price and wage stickiness (the lack of movement) gave substance to Keynes …show more content…
Keynes theory helped rebuild and stabilize the economy for a historic low. Recessions have come and gone since then but have been on a smaller scale and lasted only months to a few years. As times change so do economics. Keynesians focused mostly on aggregate demand, which worked great at the time. Now in times since the depression economist are falling on a modified version of the classic theory by focusing on the supply of goods. However, the Keynes theory has been followed in recent years. Programs such as the auto-industry and Wall Street bail outs were heavily criticized at the time. Though this bail-out cost tax payers and the government money the resulting effects of job stability and the ability to trade stocks and bonds helped stabilize the economy. New classical economics emerged as a result of studies by Robert Lucas, Thomas Sargent, and Neil Wallace. (Mansfield, (1992) p.294) Their theory was based on three assumptions. First there was an assumption that the markets cleared that inputs and outputs varied. Second, they believed in imperfect completion, many sellers individual products, by people and firms. Finally, rational expectations by people and firms. New classic theorist believe that high unemployment is not evident of a gap in actual or potential output however a result of random
Franklin D. Roosevelt, president of the united states from 1933 to 1945 (and the distant cousin of Theodore Roosevelt), was the first to convert to Keynes’s theories. He implemented massive public works programs to put people to work. Called the “New Deal”, an echo of Theodore Roosevelt’s square deal, it consisted of a series of programs from 1933 to 1938. As well as providing employment through massive works projects such as the Tennessee valley authority, which built dams to generate electricity. New deal programs provided emergency relief, reformed the banking system, and tried to invigorate agriculture and the economy. Many other programs were also put into place with were used to attemp...
I believe that it's’ important to use our constitution as a guiding tool to help appoint the correct people for the job.John Maynard Keynes was a British economist where he fundamentally changed the theory and practices of macroeconomics and economic policies of government. Although he was revolutionary most of his policies were controversial and used Keynesianism economic to get people to stay away from them . His approach to macroeconomic management was different since the previous traditional laissez-faire economists believed that an economy would automatically correct its imbalances and move toward a state of equilibrium, They expected the dynamics of supply and demand to help the economy adjust to recession and inflation without government action. Laissez-faire economics thus regarded layoffs, bankruptcies and downturns in the economy not as something to be avoided but as elements of a natural process that would eventually improve. However that was not the case for the great depression. Keynes also believed that a given level of demand in an economy would produce employment however he insisted that low employment during the depression resulted from inadequate
Keynes ideas were very radical at the time, and Keynes was called a socialist in disguise. Keynes was not a socialist, he just wanted to make sure that the people had enough money to invest and help the economy along. As far as stressing extremes, Keynesian economics pushed for a “happy medium” where output and prices are constant, and there is no surplus in supply, but also no deficit. Supply Side economics emphasized the supply of goods and services. Supply Side economics supports higher taxes and less government spending to help economy.
Cecchetti, Stephen G. "Understanding the Great Depression: Lessons for Current Policy ." Monetary Economics (1997): 1-26.
Based on my recent learning, Keynes’ approach of a balance between free market and government interference makes a better and stronger economy. In a laissez faire market, the market does not self-correct to prevent the economy from sliding into a deep recession as its proponents suggested. In fact, if the market is left to its own accord, during difficult times the economy will further weaken because manufactures will cut production, which will lead to higher unemployment, which will then lead to less disposable income, which will lead to a drop in consumer consumption, which will lead to a drop in sales and eventually another cut back in manufacturing. This is known as the Multiplier
Economist John Maynard Keynes is credited with giving deficit spending academic legitimacy when he published “The General Theory” in 1936, even though many of his ideas were rebranded. Deficit Spending, 2008 The advantages of deficit spending are that it helps curb the unemployment rate during a recession. (Deficit Spending, 2008) While both unemployment rate and government spending are factored into Gross Domestic Product, Keynes also believed that something called “the multiplier effect” which proposes that the return on deficit spending is greater than the cost that it could increase economic output.
Keynes believed that price levels have to be stabled in order to have a stable economy, and that is only possible if interest rates go down when prices rise. He also believed that the market forces alone will not deliver full employment but boosting government spending (main force of the economy in Keynes theory) will aim in his theory full employment or close to that. He believes Government intervention and spending will finally stop recession, unemployment and most importantly depression. Spending will increase the aggregate demand of the economy. As shown in the graph, Keynes believes that as you increase aggregate demand (shift it out from AD 1 TO AD 2), the real GDP increases (real GDP 1 to real GDP 2), this will then decrease unemployment (hopefully having 0% of unemployment).
John Maynard Keynes classical approach to economics and the business cycle has dominated society, especially the United States. His idea was that government intervention was necessary in a properly functioning economy. One economic author, John Edward King, claimed of the theory that:
The clash between Hayek and Keynes has defined modern economics. On one hand we have Keynes standpoint, which was if investment exceeded savings, there would be inflation, but if savings exceeded inflation, a recession would be present. On the other hand Hayek presented ideas of less government initiative and to have people make their choices on economic decisions more freely. Hayek argument on Keynes government spending was that if the economy should be more concerned with consuming or investing.
The Great Depression occurred from 1929 and lasted to the early 1940’s. It was a deep and tragic period of time where everyone was affected in some capacity. This period marks the longest most widespread depression in American History. It has devastating effects to both the rich and poor. Cities all around the world were hit hard by this crisis.
...sez-faire" and relied heavy on market forces to achieve necessary economic corrections. But market forces alone are not always able to achieve the desired recovery in the economy. Whether in the form of taxation, industrial regulation, public works, social insurance, social welfare services, or deficit spending the government must assume a principal role in ensuring economic stability. New theories and ideas came out of the depression like Keynesian theory. Which states that recessions and depressions happen because people hoard their money and to fix this the government should do the opposite and spend money(5).
The 1930s brought the deepest and longest-lasting economic downturn of the Western industrial world (http://www.history.com). This economic downturn was known as ‘The Great Depression’ (http://www.history.com). The Great Depression in the United States soon began after the stock market crash of October 1929 (http://www.history.com). Consumer spending and investment dropped which caused a decline in industrial output and led to rising levels of unemployment (http://www.history.com). During this time period money was scarce. People did what they had to do in order to make their lives happy (http://wwwappskc.lonestar.edu). The Great Depression was hard on the economy which in turn affected how people lived their lives and spent their money.
One of the most recognized Capitalist economists after the Great Depression was John Maynard Keynes who advocated for the government intervention on behalf of Capitalism to provide an economic stimulus. He opposed the populist ideas from other economists who believed markets would fix themselves, stating that “insufficient demand would lead to growing unemployment” (2011. Welna, David) and would create a cycle of misery. He believed that capitalism would end from lack of buyers, sellers, producers, demand, employment opportunities, and money being exchanged in the economy. His beliefs were embraced by the US, although, government failed to follow his advice on using this only as a short term solution. Since then our National debt has risen to trillions of dollars.
The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)
Keynesian economists, similar to Classical economists, also believe that the economy is made up of consumer spending, government spending, and business investments. However, the Keynesian Theory says government spending can improve economic growth in the absence of consumer spending and business investment (Differences). According to the Keynesian theory, wages and prices are not flexible. A static price will give a horizontal aggregate supply curve in the short run (Classical and Keynesian Economics).