Keynesianism and the great Depression
Gabriel Gullion
In the 1930's during the Great Depression, current economic concepts were not able to provide answers for the causes or any solution. British economist John Keynes discovered that the current economic theory would not solve the problem in the short-term. It was believed that free markets would automatically provide full employment to the population. Keynes proposed a theory, known as Keynesian Economics, focuses on aggregate demand is the most valuable force in an economy. He also claimed that free markets do not have any automatic means of self-correction that would lead to full employment. The output of an economy's goods and services is the combination of four factors: consumption, investment, government purchases, and net exports. When demand increases it is directly from one of these four components. However, during a recession the demand is decreased in the consumer sector. This leaves the government responsible for most of the output.
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John Maynard Keynes
"In the long run we are all dead." |
For the engine which drives Enterprise is not Thrift, but Profit.
Because the Great Depression was in a state where outputs were low and unemployment was high, Keynes concluded that prices and outputs would not return to equilibrium on their own. He also thought that an economy was constantly expanding and contracting (in flux). He advocated a countercyclical fiscal policy which said that during expansion periods the government should increase taxes or cut spending. When the economy was in contraction, he advised that the government should take on debt in order to provide stimulation. Keynes acquired a following that advocated that individuals should save less and spend more, increasing consumption and in turn decreasing unemployment.
Because the Great Depression was in a state where outputs were low and unemployment was high, Keynes concluded that prices and outputs would not return to equilibrium on their own. He also thought that an economy was constantly expanding and contracting (in flux). He advocated a countercyclical fiscal policy which said that during expansion periods the government should increase taxes or cut spending. When the economy was in contraction, he advised that the government should take on debt in order to provide stimulation. Keynes acquired a following that advocated that individuals should save less and spend more, increasing consumption and in turn decreasing unemployment.
Sources
Hazlitt, Henry. “Keynesianism in a Nutshell | Henry Hazlitt.” FEE, Foundation for Economic Education, 1 Nov. 1982, fee.org/articles/keynesianism-in-a-nutshell/.
“What Is Keynesian Economics?” What Is Keynesian Economics? - Back to Basics - Finance & Development, September 2014, www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm.
“What Is Keynesian Economics?” What Is Keynesian Economics? - Back to Basics - Finance & Development, September 2014, www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm.