During this period, many economies moved away from use of the gold standard and adopted monetary systems that required a new economic theory to guide policy makers in dealing with economic activities within an expanding and more complex economic environment. Keynes developed and published his economic theories during the Great Depression. In his paper The General Theory of Employment, Interest, and Money (1936), Keynes argued that aggregate demand was innately unstable because people made investment decisions based on the unpredictable “animal spirits” of business expectations. Keynes proposed that if people developed pessimistic expectations about the economic environment, they would pull back on investment activities which in turn would result in a reduction of aggregate demand, output, and employment. When Keynes spoke of investment he was not referring to investments such as those in the stock market, but to investment in the production of goods and services.
As the world economies slowly recover from the worst man made money disaster in history, which affected indeed the whole world one way or the other, we are seeing different ways for the governments of the world to deal with this situation. Right now the competition between the countries of the world is to see who recovers first. Clearly there are some winners and some loser or it might be too soon to tell. Countries like China, India and maybe Brazil are at the forefront of the world recovery effort. These countries, which were considered developing nations or third world countries have emerged from the global economic crisis as the new face of world economic powerhouses.
Finally, it is suggested the party’s attitude to these questions is illustrative of the way in which economic ideas in the public sphere are inevitably conditioned by the political interests of the politicians who promote them. I The Britain of the 1930s is generally known as an era of ‘slump’ at home and ‘appeasement’ abroad. Indeed, at the time, these issues - perceived economic decline and alleged willingness to truckle to dictators - formed the main bases of the Labour Party’s attacks on the National government. Economic and foreign policy were, moreover, intrinsically connected. G.C.
The crisis began with the Great Depression, as argued by Abramovitz (2004) it was the collapse of the American economy in the 1930s that led to the rise of the welfare state. This change in the welfare state meant a stronger response from the government was needed. The economy counted on the government to offer a New Deal that would restore profits by fostering economic growth. The New Deal focused on programs that would provide relief for the poor, such as AFDC or Food Stamps and Social Security for the unemployed, retired or disabled. The New Deal also focused on the recovery of the economy to normal levels and reform of the financial system to prevent a repeat depression (Chen 2013).
However, when the economy is in an inflationary situation, there is the need to implement policies to reverse this trend; these policies are referred to as contractionary fiscal policies. This article seeks to highlight the workings of Monetary and Fiscal policies. Contractionary Policy Effects • Contractionary policy is any government policy aimed at reducing aggregate output (Y). • Why would the government want to reduce Y? One purpose is to
Monetary policy can be defined as the activities done by the central bank to impact the amount of money and credit in the economy. “Getting monetary policy right is crucial to the health of the economy” Mishkin 2010. Too expansionary a monetary policy can result in high levels of inflation, which then decreases the efficiency of the economy and hinders economic growth. However, too tight a monetary policy can result in indisputable recessions in which output decreases and the unemployment rate increases. The central bank should utilize different strategies, depending on what is occurring in their respective economies, to conduct monetary policy.
Yale University economist Irving Fisher wrote in 1933 on the relationship between economics and economic history in his "Debt-Deflation Theory of Great Depressions" (Econometrica, Vol. 1, No. 4: 337–338): 'The study of dis-equilibrium may proceed in either of two ways. We may take as our unit for study an actual historical case of great dis-equilibrium, such as, say, the panic of 1873; or we may take as our unit for study any constituent tendency, such as, say, deflation, and discover its general laws, relations to, and combinations with, other tendencies. The former study revolves around events, or facts; the latter, around tendencies.
But what was the cause of it all? Many economists argue on what the highest contributing factor to the crash was, but most agree that it was America’s lack of leadership in the global economy. There were many ways that the United States government went wrong that were the root of the downfall, such as; the misuse of the Gold standard, the trade restricting tariffs and protectionist policies that were imposed in the 1920’s, and the number of American banks and the bankruptcy crisis all were major factors to the Great Depression. America gained control of the global economy from Britain after the war, and were unable to keep a constant flow of gold and stability in their country, and consequentially lead to the Great Depression. The gold standard was developed to have a steady exchange rate of currencies, as well as a way to back up domestic currency reserves.
My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith.
By first examining the monetarist view as advocated by Friedman and Schwartz then examining the gold standard hypothesis, it becomes clear that while a substantial fall in money supply did occur during the years of the depression, such a fall should be attributed to the difficulties encompassed by the international gold standard rather than irresponsibility and inaction on the part of the Federal Reserve (Friedman and Schwartz, 1993; Eichengreen 1992). The beginning of the descent into the depression began with the Great Crash in October 1929. Though real output had already started falling slightly prior to the Great Crash, it can still be tied to the dramatically accelerated fall in output that followed it. Immediately prior to the crash, from August 1929 to October 1929, industrial production had only slightly declined by 1.8 per cent. Immediately following the crash, production fell an astonishing 9.8 per cent, only to be followed by a further