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Condition Of Keynesian Economics After The Great Depression

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Before the Great Depression, factory owners and executives earned more than their workers. The wealthy owners then had more investments in the market, resulting in the top earners remaining wealthy and in power. From the great depression to modern times, Keynesian economics have shaped our economic theory, social life, and views of the market. Keynesian economists proposed reducing interest rates and investing in social projects in order to stimulate the economy. It worked after the depression, but it failed in the 1970’s as monopolies, mergers, and unemployment rose. In the Golden Age, the economic model was focused on internal demand and domestic trade. After 1981, the focus changed becoming concentrated on international foreign trade.

The Great Depression shaped economic theory, social life, and people’s viewsof a market economy in general. Answer the following questions:

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.

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In order to stimulate the economy to get out of the depression, Keynesian economists’ recommended reducing interest rates and investing in social projects.The depression was caused by vast unemployment while a lack of investments were made which unsuccessfullyoffset savings. Hunt said that on Black Thursday “the New York stock market saw security values begin a downward fall that was to destroy all faith in business” (Hunt, 190). As the stock market fell, the businesses could not afford to pay wages so the unemployment rates skyrocketed.In many cases, the market performed so poorly that large businesses went under. As a result, thousands of highly skilled workers were unemployed and working for low wages was mandatory because the available job market was minimal. In addition, the U.S. “had plunged from the world’s most prosperous country to one in which tens of millions lived in desperate, abject poverty” (Hunt, 191). According to Hunt, the rich saved a higher percentage of their money than the poor. To stimulate an economy, more money needed to be invested, but in reality it was being saved, so the economy could not change.

After the Great Depression, reducing interest rates and increasing government investment in infrastructure was believed to help stimulate the economy. The reduced interest rates gave those with savings a greater incentive to invest. As long as the interest earned from investments was higher than from a bank, they chose to invest. Keynes concluded that “As the aggregate income of society increases, total savings increase more than proportionately” (Hunt, 194).Keynes suggested that the government should intervene for “when saving exceeded investment, to borrow the excess saving, and then spend money on socially useful projects” (Hunt, 196).The Keynesian economists argued that the inefficient macroeconomic outcomes were often the cause of the private sector’s decisions.Keynes preferred to invest in the construction of public works because doing so “would probably benefit middle- and lower-income recipients much more than the wealthy” (Hunt, 196). Keynesian principles gained popularity as the reinvestment strategies used were effective and resulted in more social projects benefitting society as a whole.

On the other hand, many banks and wealthy business owners used the concept of circular flow to earn and reinvest the most money in order to gain exponential profit. A continuous flow of production, income, and expenditures is known as circular flow of income. Keynes described circular flow as money flowing “from businesses to the public in the form of wages, rents, interests, and profits; this money then flows back to the businesses when the public buys goods and services from them” (Hunt, 192). In other words, the income of an individual, that was created from profit, is used to buy products or stock that will intern create more profit.Therefore, when businesses “sell all they have produced and make satisfactory profits, the process continues” (Hunt, 192). The basic economic model that businesses followed, and the reason why the rich executives became much wealthier than the masses, was to gain interest and fees of trade, pay employee wages and other expenses, then keepor reinvest all of the profit. The profit margins for the successful banks were tremendous.Banks only function properly whenthe money from people’s savings is offset by those whotake out loans from banks.When loans are not being taken out, the bank has too much capital and will lose money from paying out interest to its’ saving customers.Banks failed during the Great Depression because investments did not offset savings as everyone simply saved the money they earned.In 1925, “the wealthiest 5 percent to the population owned virtually all of the stocks and bonds and received more than 30 percent of the income” (Hunt, 196). As a result, unemployment rose, interest rates lowered, public projects came to a halt.

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.

The Keynesian perspective broke down in the 1970’s because unemployment rose and monopolies created unfair advantages for businesses to exploit the consumers. After the war, unemployment rose because thousands of troops returned without jobs. In addition, there was less money spent overseas because we were not as represented in other countries. Since our international trade was deficient, profit from imports and exports could not support our economic needs. Keynes said the government would need to take action with taxation to help stimulate the economy because the foreign exchanges at the time were not large enough to stimulate it alone. Within the U.S., corporate growth was tremendous because highly skilled workers were available to hire, we had a strong industrial infrastructure, while other countries were just beginning to rebuild. As a result, our consumers were given fewer consumption options.Also, many successful companies bought out smaller, weaker, or dying ones. These buyouts and mergers caused monopolies within the industries. The monopolizing companies’ profits boomed because they could set any price for their products. When the masses were unable to afford the products because of high prices and little income, the companies failed. Unfortunately, the government was too reliant on the monopolies, so they were forced to bailout failing companies in order to keep industries alive. In terms of the public sector, the International Monetary Fund (IMF) was created to “help struggling nations by lending them ‘hard currencies’ such as the dollar with which to buy goods to develop their economies” (MES, 136). The creation of the World Bank was also created to provide social industrial “financing for major investment projects such as roads, bridges, and so on” (MES, 136).

When there is compensatory government spending, bailouts and other losses are covered by the government because there is too much importance in a large business. The increase in volume of expenditure for goods and services only hinders the businesses profit margins. The more money that is spent on the product and it’s makers means the market price will need to rise or the profit margin will lessen. When a large business goes bankrupt, all of the other industries that were dependant will suffer from decreased demand. For example, when Ford Motor Company failed, unemployment increased, profits dropped, but not just for Ford. Many industries experienced the same deficits because they supplied materials for Ford. As a result, the demand from Ford ended which affected thousands of employees of other companies.

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

In the Golden Age, the economic model was focused on domestic trade whereas the focus after 1981 concentrated on foreign trade.In order for the circular flow of Keynesian economics to work was if there was reciprocal circulation of income between producers and consumers. During the Golden Age of American Capitalism, The rise of national banks caused a resurgence of wealth. The creation of national banks gave the government more control. National banks were required to have a predetermined reserve on hand at all times in that Federal Reserve’s district.Therefore, with more money circulating, investors were able to build suburbs and industries that would only be successful originally in America.The demand for products skyrocketed as household consumption rose. In addition, the creation of labor unions caused the labor force to actually receive higher wages and have a vested interest in the companies’ productivity.The growth of building and a new way of life after the war resulted in a boom in the economy. At that point the modern consumption habits began.

Investments in social programs along with the creation of the New Deal enhanced the economy within the U.S.. The New Deal was an objective “enunciated by the governors of the Federal Reserve and by many leaders of the Roosevelt administration” (MES, 115). This monetary policy was designed to “help restore growth of the economy itself” (MES, 115). When the economy plummeted, the Board of Governors of the Federal Reserve “Slowed down the increase in the supply of money by raising interest rates” (MES 116). Another feature that greatly influenced U.S. capitalism was structural changes in response to the war. The combination of labor, technical, and governmental change resulted in a more efficient supply for products. The government also implemented social security, unemployment benefits, and agricultural price supports for farmers. The combination of these benefits made the U.S. economy stronger and wealthier.

Technology advances gave U.S. industry even more of an advantage because production rates increased. The quantity of products produced was cheaper to create, required less labor costs, and the demand for the products was still high.In “A Job at Ford’s”, the production rates were incredible as they cornered the car market. In 1913, the U.S. had over one third of the global industrial output. This meant that our overall exports were greater than imports. The profit made from golden age was unbelievable because they were well organized with clear production objectives. The many “improvements in technology were such that larger-sized plants were necessary to take advantage of more efficient methods of production” (Hunt,119).Firms would stress a boostin efficiency to have low cost and high profit. The overhead of firms was primarily parts and labor. Having the most efficient assembly line in a factory was the difference between the number one and number two factory. More efficient firms could have fewer employees, lower production costs, lower market prices, and higher profit margins. Some commodities are necessary but not profitable such as roads, or railways. These commodities would be “‘consumed socially’, and their production and sale might never be profitable in a laissez-faire capitalist economy, even though they might be deemed highly desirable by most citizens” (Hunt, 126). The public sector often invests in public projects because they are necessary for the private sector to remain profitable. Even if the socially consumed commodity is not profitable, the “producer still profited from making and selling it” (Hunt, 126). For example, Ford didn’t invest in building roads, but he sold more cars when the roads were made.

After 1981 international trade became a major source for the economy’s growth. The rise of imports and exports from international trade caused an increase in profit from the U.S. economy. Unlike the Golden Age, this profit was not gained from trade and demand within our society. Instead we became much more reliant on other countries, other countries’ economies also grew with ours, and the demand for products here and abroad continued to increase. Even though our economy grew because we started trading with other countries, it also resulted in being more reliant on other countries. The international economies were on equal footing with ours because other countries industries began to thrive as well.The political struggles that can occur because of necessary alliances for trade can be detrimental to our overall power and leverage. Since we began to import more goods that cost less to make, it resulted in more money going to those countries. In all, the foreign economies that originally were struggling after the war ended up taking over many industries. Our imports and exports needed to be offset in order to be profitable or else we would lose money. Whether the transaction involves money, goods, or labor, the exports need to either be greater than or equal to the imports or else the economy would fail. Finally, the demand of products from foreign countries caused Americans to outsource as much as possible and consume those products.


Before the Great Depression hit our economy, the rich became exponentially more wealthy and powerful as the economy was controlled by them and gave them advantages.From the Great Depression to the modern era, Keynes and Keynesian economists have changed our economic theory, social life, and views of the market. To stimulate the economy after the Depression, Keynesian economists thought reducing interest rates and investing in social projects would solve the economic problem. It worked after the depression, but it failed in the 1970’s as foreign trade, corporate power, and unemployment increased. The difference between the Golden Age and the 1980’s to 2000’s were that the products were demanded and traded within the U.S. economy instead of trading within foreign economies.

 On my honor, I have not given, nor received, nor witnessed any unauthorized assistance on this work.


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