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 them and, most importantly, the

logic behind them.

B. Explain how the Keynesian approach to guide economic public policy

constituted a ‘middle way’ or ‘centrist’ approach compared to the liberals and

the radicals in the USA in the 1930s.

C. Explain how the ‘consensus’ Keynesian perspective guided post WWII

America, e.g., how the state managed the market system in this era, and also

how it broke down in the 1970s, allowing a new, more ‘pro-business’ approach

to economic public policy emerge in the 1980s.

D. Finally, what are some of the major differences between the post WWII

era the neoliberal era and how can we explain them?

Answer 1

Answer to A :-

The great depression :-

1) It started with an investment collapse following excessive build up .

2) This shifted aggregate demand to the left

3) Stock market collapsed creating wealth effect .

4) Contradictory fiscal policy

KEYNESIAN SOLUTION:-

In the above diagram we can see how the aggregate demand shifted to left from year 1929 to 1933 with a similar shift of supply curve thus decreasing the prices.

Keynesian suggested that government should take up Expansionary fiscal policy because the government needs to increase aggregate demand due to which supply mechanism will also adjust itself correcting the problem of economic depression.

Answer to B :-

1) According to the classical liberals there was a state of full employment when demand and supply were in balance.

2) They believed in the natural law of economics that it is individual responsibility to save for bad times during periods of prosperity

3) Keynesian opposed this and suggested that :-

a) Full employment is unrealistic

b) Government intervention is required

C) it denied self adjusting system

d) He argued that at the time of instability people reacted with hoarding Money which harms the economy.

Answer to C :-

1) The move from welfare capitalism to welfare state was motivated by Great Depression.

2) What began to emerge was modern Liberalisation.

PRE DEPRESSION PERIOD :-

3) US was the richest country in the world.

4) Factory workers were paid well and they spend money on consumer goods .

5) But the economic depression hampered this period of growth.

POST DEPRESSION PERIOD :-

6) After this Huge companies took over small companies .

7) It lead to creation of monopoly.

8) It also lead to concentration of wealth in few hands .

9) Exploitation of workers rose high which led to poor wages and high unemployment level .

10) Keynesian proposed solution of expansionary government policy which helped the US economy to come out of bubble.

POST WORLD WAR 2 :-

Government spend too much money on Vietnam War , sending the first man on moon .

Here the Keynesian Solution stopped working

Unemployment became worst which created inflation.

Answer to D :-

In the non liberal era , there was a general sense of prosperity as workers were paid well and they spend their income on consumer goods which in turn increased the aggregate demand .

Even when economic depression struck the Keynesian government intervention approach worked .

However post world war 2, Keynesian theory stopped working.

Classical liberalism gained pace which allowed people to achieve what was in their own best interest with little interference from government.