Question

In the early 1930s depression, as thousands of banks, businesses, and millions of jobs were vanishing, some prominent economists and policymakers argued that a laissez-faire approach was best: government should not spend any money to help save companies and jobs. Instead, they argued, it should wait until the marketplace completed its “creative destruction” of vulnerable firms. If that process took many months or years, what could be the negative consequences of such a hands-off approach.

Answer 1

Depression is a economic cycle wherein there are huge job losses, companies fail to survive, banks are unable to run due to huge non performing assets, as evident during 1930. Many economists argued to let not government intervene, however it can have huge impact and can make scenerio more worse.

• If government doesnt support then private players will not move ahead to work for the benefit of society. There will be an increase in the gap of rich and poor.
• If banks and financial institutions are not supported, then people will stop believing them and will not invest their hard earned money. It will result in lower money creation in an economy.
• If financial institutions collapse badly, then investment wont remain an economic aspiration. It will lead to lower investor's trust. Economy will collapse more.
• If government doesnt save companies, it will lead to insolvency of some firms hence it may result to monopy of a single firm (in some sector)in the future, resulting to poor pricing mechanism in future.
• It will take years to achieve the same pace of growth and development. Untill government reacts and helps, unemployment will continue and productivity will be on decline.
• Depression also brings deflation in an economy, or low inflation, which impacts value of currency and hence foreign investments.

So that all such situation doesnt arrise, govenment must intervene and act accordingly to help the economy get stable.