Peoples Views of the Market Economy - Case Study Example

The Great Depression Shaped Economic Theory, Social Life and People’s Views of the Market Economy in General The Great Depression The Great Depression was the worst economic depression of the 20th century. It lasted over a decade. It began in 1929 and ended sometime in 1939. It was the longest depression to have ever occurred in the Western world. The depression started in the United States of America and said to have began when the stock market of the New York Stock Exchange crashed on October 29, 1929 (Black Tuesday). It affected many industrial countries such as Germany, Great Britain, France, Netherlands, United Kingdom and the nations of South America which had either invested in the U.S. economy or had trades with them (us.history.com). This soon spread to almost every nation in the world. The Great Depression dealt one of the heaviest impacts in the economic stability of the United States. Unemployment rate and taxes went up while income, output and prices had dropped. Unemployment in the U.S. rose from 8 million to 15 million while the Gross National Product (which measures the output generated by a country’s enterprise) decreased from $103.8 billion to $55.7 billion. Farmers have had their struggles, since during that time a draught hit the Great Plains which also caused severe dust storm–this was known as the Dust Bowl or Dirty Thirties. When the stock market crashed, over $40 billion worth of investment was lost (us.history.com). Some banks which invested in the stock market were forced to close. Consequently, many people started withdrawing their savings causing more banks to close down. This eventually made over 5000 banks to fail. Without money to spend, more than 32,000 businesses went bankrupt. Due to the unemployment, crime rate and prostitution incidence went up. Many people became hopeless and depress contributing to the rise of suicidal rates and alcoholism. Mass migration took place almost everywhere. Farmers whose farms were ruined by Dust Bowl migrated to other states hoping to find work there (history1900’s.about.com). Herbert Hoover, who was president at that time, based most of his responses to the Great Depression in his firm belief of volunteerism. He declined direct federal relief payments as he believed it would lose the enticement of working. Hoover has had urged banks to form a consortium known as the National Credit Corporation. These banks are pressed to provide loans to small banks to prevent them from collapsing. He approved the Federal Home Loan Bank Act to spur new home construction and to reduce foreclosures in response to the numerous Hoovervilles (also known as shanty towns or tent cities) that had begun to appear across the country (us.history.com). Hoover also enacted the Revenue Act of 1932 to help increase funds for the federal budget. This did not help the people at all, since an increase in taxes would lessen potential income earned and further reducing purchasing power. The worst of his decision was his approval of the Smoot-Hawley Tariff Act. Perhaps we can derive more knowledge regarding the Smooth-Hawley Tariff Act from a commentary: “The legislation raised tariffs on thousands of imported items. The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods, while raising revenue for the federal government and protecting farmers. However, economic depression now spread through much of the world, and other nations increased tariffs on American-made goods in retaliation, reducing international trade, and worsening the Depression” (Future.state.gov). Hoover responses where well-meaning yet ineffective. Franklin Delano Roosevelt who was elected on the premise that he would end the Great Depression introduced several actions that would come to be known as the New Deal. He passed several laws that were aimed to provide relief to victims of depression and had reformed business, financial and agricultural practices. Roosevelt restored public confidence to banking and financing system by first passing the Emergency Banking Act and then signing the Glass–Steagall Act which created the Federal Deposit Insurance Corporation (FDIC). He also took several actions to increase the earnings of farmers. He had taken measures to promote fair practice in the business sector (Fdic.gov). Finally, he passed additional laws for reform and relief efforts. Most of Roosevelt’s programs helped increase the spending of the people which were approved by Keynesians. The Keynesian style seems to have lessened the depression. Yet regardless of the efforts of Roosevelt, it was not enough to end the Great Depression. The Great Depression had such a great impact on the America’s economy that it has change people’s perspective on how the economic market works. One such change was the shift of confidence from Liberal Economics to Keynesian Economics. So what made the people lose faith on liberal economics during the Great Depression? 2. Economic Liberalism Economic Liberalism is a component of classical liberalism which believes that the people should be given the freedom to go into buying, selling, trading, working and employment without the interventions of the government. This supports the idea of a free market which promotes laissez-faire (“leave it alone” or “let it be”) and the idea of private property as an important tool in terms of productions. (economictheories.org) The concept under Economic Liberalism is that people should be left alone because self-interest (invisible hands) motivates the people to go into the market. Without these restrictions, they are able to produce better results, but with the notion that certain standard should still be considered in order to promote justice in the system. The governments roles then are to provide basic public goods such as the construction of roads, canals, schools and bridges which private entities could not easily implement. During the Great Depression people saved what little savings they had left and withdrawn money from the banks and stock market. This evidently stopped the movement of the economy. The government during that time made it worst by introducing tariffs to protect the domestic economies. Other nations responded by creating their own. This slowed down the international trade and had also slowed the global economy. Other countries could not trade with America because the government had refused to allow money bill transactions since they preferred gold as they have most of the world’s supply. The Government also supported the Economic Liberalism viewpoint and refused to give out funds to the people. (English.illinois.edu) The Great Depression and its effects caused a greater number of people in North America to question the classical liberal economist system being used during that time. The people had begun to think that government needed to take a greater role in resuscitating downward spiralling economy. The Great Depression pushed people to move away from economic liberalism to a more ‘involved’ economic system. And it influences the government to use Keynesian Economics perspective as its basis for any of its future activities. 3. Keynesian Theory Keynesian Economics is a macroeconomic theory made by 20th century British economist John Maynard Keynes. Keynesian economics explains that a person’s spending goes towards another persons earnings. And when that person spends, his earnings went to yet another persons earning, so on and so forth. This goes on to a continuous circulation of money but when people stop spending and start hoarding their wealth, the cycle stops, resulting in a recession. The Keynesian Theory was in disagreement with the view of a liberal economist. Keynes argues that changes in the price will not lead to full-employment equilibrium. Wage cuts will not always work as employees would become unhappy with the wage cut and resist it. Liberal’s views were base on the Quantity Theory of Money that revolves around the Fisher Equation of Exchange: MV = PT Where: M is the amount of money in circulation; V is the velocity of circulation of that money; P is the average price level and; T is the number of transactions taking place; Keynes disagrees with this. He explains that the circulation of money (M) may still fall because there is too much of it being supplied (T). Also increase in supply of money (M) may lead to an increase to the number of transactions taking place (T) because it is maybe in a position where demand becomes insufficient for full-employment equilibrium. For him, the economy could settle at any equilibrium level of income at any time. (interzone.com) During the Great Depression, people were afraid to spend. This kept the economy on a stand still. The solution to this was for the Government to step in and spend for them. They can do this by either increasing the supply of money by giving out funds (e.g. bail-out or stimulus plans) or buying things from the market themselves. An increase in money’s supply would move the economy back on track. With more funds, banks can be able to provide loans to the people. So, people can start spending, thus increasing the profit of business. Then business will start to grow. Its growth can fuel in more money for the bank to circulate. This theory has help bring out America from the depression, but that wasn’t entirely the case. The government spent on another form instead: warfare budgets which unintentionally still worked, finally ending the Great Depression. 4. Fall of Keynesian Economics After the war, Keynes’ ideas became widely accepted. Throughout the 1950’s, the government has been leading most of the industrial development. They continued to use fiscal and monetary counter-cyclical policies. Finally, it came to a point when prosperity has become permanent. But when oil shock of 1973 struck and other economic problems during the 1970s added more economic problems, Keynesian started to fall out unfavourably. Increasing unemployment rates, high inflation and contradiction of Philip’s curve prediction gave much stress to the application of the theory. It was not clear whether Keynesian theory would prevent recession or merely prolong it for a more destructive recession or even worse depression. Expansionary and contracting policies then needed to be applied at the same time, which were impossible. Because of this, liberalism was then given the opportunity for a comeback causing a “policy bind” and mark the fall of Keynesian consensus on the economy (Martin.frost) 5. Keynesian Today Keynesian Economist can still be used today but only towards short-term runs. A decrease in aggregated demand can be remedied by short cyclical movements of employment yet sustaining growth will largely depend on how a country’s market can quickly accumulate capital, supply jobs and advance in technology. Increase in government spending can only give temporary relief to demand and output but will not be effective in major and long-term funding projects. Particularly, government spending would mean higher taxes which neglect the incentives of saving, investing, innovating and work in general. During the Great Depression, Keynesian Theory greatly uplifted the economy but only under those conditions can the theory be of use. Today, macroeconomics requires a different solution in answering fundamental forces of personal incentives and institutional rigidities. Another viewpoint which makes Keynesian difficult to be reintroduce to today’s society is that people could just simply hoard money again. When people start receiving fund and hadn’t used the funds received, it could bring more harm than good. This would create even higher unemployment rates as the gap between rich and the poor greatly widens. People would then pull money from their investment or banks greatly reducing circulation of funds. This may yet cause another depression. Work Cited “About the Great Depression.” English.illinois.edu. Modern American Poetry. n.d. Web. 26 Apr 2011. “Keynesian.” Interzone.com. Economy. n.d. Web. 26 Apr. 2011. “Keynesian Economics.” Martinfrost.com. n.d. Web. 26 Apr. 2011. “Smooth – Hawley Tariff.” Future.state.gov. U.S. Department of State. n.d. Web. 26 Apr. 2011. “Social and Cultural Effects of the Depression.” Ushistroy.org. U.S. History. n.d. 26 Apr. 2011. “The Great Depression.” Nps.gov. The Eleanor Roosevelt Papers. 2003. Web. 26 Apr. 2011 “The Great Depression.” Jennifer Rosenberg. About.com. 20th Century History. 2011. Web. 26 Apr 2011. “The Great Depression.” Ushistory.com. United States History. n.d. Web. 26 Apr. 2011. “Top 5 Causes of the Great Depression.” Martin Kelly. About.com. 20th Century History. 2011. Web. 26 Apr. 2011 Read More