The Great Depression shaped economic theory, social life, and people’s views of

Question

The Great Depression shaped economic theory, social life, and people’s views of a market economy in general.

A. What were some of the things Keynesian economists proposed doing to get society out of the depression? Explain the logic behind them and how government policy helped to guide the economy post war.

B. Explain how and why the ‘consensus’ Keynesian perspective broke down in the 1970s, allowing a new, more ‘pro-business’ approach to economic public policy emerge in the 1980s.

C. What were some of the primary difference in economic performance between the Golden Age and the US economy post 1981 (be specific) and how can we explain them?

D. What might be some solutions to our current economic problems?

Explanation / Answer

Ans a. The Great Depression (economic downturn) began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world. This lead to fundamental changes in economic institutions, macroeconomic policy, and economic theory. Although its origination was in the United States, the Great Depression caused drastic declines in output, severe unemployment, and acute deflation in almost every country of the world. Its social and cultural effects were no less staggering, especially in the United States, where the Great Depression represented the harshest adversity faced by Americans since the Civil War.

Keynesian economists proposed that the way to escape the Great Depression was through a combination of two approaches. First we should reduce interest rates. Second, the government should begin investing in infrastructure, which injects income into the economy, creating increased spending by the public. Theoretically, this increased spending stimulates business investment, along with more production to meet the increased demand. This cascade of events jumpstarts a moribund economy which would help the economy out of depression.

But unfortunately, the World War II came along the same time when the Keynesian ideas were being put into practice. The government was forced to radically ramp up spending in order to manufacture equipment and supplies for aiding the war activities.

Ans b. In the 1970s, the system of managed exchange rates broke down. Inflation rose while economies stagnated. Unemployment in many countries soared. Keynesian theory of demand management did not hold true and anti-keynes critics attracted greater attention.

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