The halcyon days of economic liberalism occurred in the mid years of the 19th century. During this time, the sun did not set on the British Empire, and Great Britain became the industrial center of the world. Because the British Empire was immense, and raw materials poured in from all over the world, British industries had little to worry about relative to foreign competition. During the 1870s, however, a world economic crisis was brought about by growing monopolies and the concentration of wealth in the hands of a few. Moreover, by this time, the Germans and the Americans had also become major players on the world economic stage, thereby challenging British hegemony over the world economic system. Of greater significance, however was the fact that laissez-faire economics had allowed a slow progression away from individual capitalism to growing monopolies. Even then, however, economic liberalism was not soundly rejected until the great depression of the 1930s.
John M. Keynes a British economist was the First Baron of Tilton. During the depression years, he revolutionized economic theory by arguing that employment is dependent on national production governed by the volume of demand for consumer goods, and by private and public investments. Keynes maintained that it is possible to achieve equilibrium with less than full employment. In general, his theory is as follows: when a decline in spending brings about a reduction in investment, incomes will decline until the desire to save comes into balance with the desire to invest (in other words, when people slow spending and increase savings, demand falls, profits fall, employment falls, and economic upheaval occurs). Keynes believed that the depression of the 1930s made it clear that modern capitalistic economies cannot sustain sufficient levels of investment to bring about and maintain full employment. Therefore, he called for government control of economic activity (state capitalism). He also argued, however, that the economy should be allowed to respond to the decisions of consumers and producers who would generally act in their own best self-interests and, in turn, accidently, in the best interests of the greater good. Keynes presented an alternative to communism, because his model allowed governments to borrow and spend in order to overcome an economic depression, while at the same time protecting competition in the market place.
Although President Franklin Roosevelt was not initially a follower of Keynes, he eventually came to believe that in order to save capitalism, the government must take an active role in managing the nation’s economy. Starting in 1933, Roosevelt called for increased government spending to stimulate the economy (prime the pump) in order to jump-start spending, create markets, and encourage investment. His efforts were partially successful, but it was not until World War II that the nation actually achieved full employment. Furthermore, it is important to understand, that despite his enactment of many government programs, Roosevelt’s long-term goal was to balance the budget. Many years later, a Republican President, Ronald Reagan, encountered a similar dilemma. His goal was to balance the budget, but he was never able to make that happen. Currently, the debate between conservative Republicans and President Obama reflects the venerable tension that exists between those who believe the government should refrain from fine-tuning the economy, and those who believe that such efforts are essential to the well-being of the American people.
Check Your Understanding
In what ways did Keynsian economics accelerate the end of economic liberalism?
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John Maynard Keynes articulated an economic model based on a government regulated market system. During the Great Depression of the 1930s, the Roosevelt administration adopted the Keynsian notion that government should replace laissez faire economics with government programs designed to manage and regulate economic activity (e.g., unemployment insurance and farm subsidies).