On Keynesian economics and the Great Depression
John Maynard Keynes (1883-1946), circa 1940
When examining the Great Depression, historians and economists attribute the causes and solutions according to different economic theories. John Maynard Keynes, a British economist, developed one of the major theories with a foundation in what is now known as Keynesian economics.
John Maynard Keynes studied economics at Cambridge University, worked in India for the British civil service, and later taught economics at King's College. In 1911, he became the editor of Economic Journal, published by the Royal Economic Society. Keynes is one of the most renowned economists of the twentieth century. He published his major work, The General Theory of Employment, Interest, and Money in 1936, during the Great Depression, and that book has been compared to The Wealth of Nations and Das Kapital. (1)
Roosevelt & Churchill 1945
In this blog post, the scholar will examine Keynes' work, along with that of other scholars, to describe Keynesian arguments for the causes of the Great Depression and the application of his theories to the Depression-era and World War II, during which he offered economic advice to both Winston Churchill and Franklin Delano Roosevelt.
Keynes' arguments during this period centered on a few main concepts. First, he challenged the widely accepted notion that the market's own forces would spark a recovery. Secondly, he used history to argue that "capitalist economics limited the ability of private investment to stimulate renewed economic growth." (2) And, thirdly, that public investment was the way to stimulate the economy and boost consumption, which would bring about recovery to the market. (3)
Many have applied these theories to the Great Depression in the United States. According to Keynes, the Great Depression was the result of a lack of demand for goods, which resulted in the diminished demand for labor. To solve this problem, government spending would increase demand for products, increase production, increase employment, increase income, and further sustain increases in demand from consumers. (4) Basically, government spending to put people to work, like the Works Progress Administration (WPA), which employed about one-third of the American unemployed, would help to get consumers back to demand generation. (5) Keynes also argued that people saving money rather than spending it also contributed to the decrease in demand. And in those cases, government spending would breathe new life into the supply and demand relationship in the market. Keynes wrote, "The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government," which is precisely what New Deal programs like the WPA attempted. (6)
In addition to the lack of demand Keynes ascribed to the American Great Depression, he explored other causes. In his The General Theory of Employment, Interest, and Money, Keynes discussed the dangers of speculation, citing America as a prime example. According to White, "at the height of the market in August 1929...many began to fear that there was excessive speculation." (7) White also cites examples of economists who argued against that. Keynes describes the concern with speculation, stating,
"As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market." (8)
This description of American speculation also helped to bolster Keynes' argument that the market would not recover on its own since the people participating in the market were behaving in an unorthodox and volatile manner for financial markets. Most people agree that many of the causes identified by different economists played roles in the stock market crash of 1929 and the subsequent events. Keynes offered advice to improve the situation and in favor of government intervention, but the eventual demise of the Great Depression can be controversial amongst scholars. Some attribute the Second World War and government spending to America's emergence on the other side of the Depression. This is often used as proof positive in support of Keynesian economics, crediting the government spending for the economic boom of the Second World War and the subsequent consumption by the American people. It would seem to fit Keynes' theories quite well. However, some scholars argue that, if Keynes' arguments are taken precisely as they are worded, that domestic spending by the government over the same period of time would have been equally as impactful for the economy. However, in some scenarios, that is not the case. Gary Wolfram argues that "[w]hat really moved us out of the Depression was a combination of factors that would boost our economy today just as well. They include the increase in international trade, fewer government regulations on the economic system, and lowered corporate and personal income tax rates that were implemented after the war." (9)
Although disputed, many of Keynes' ideas seemed to have impacted the American economy by lowering unemployment, increasing government spending, which increased production, increasing income in the general public, and subsequently sparking increased personal consumption. These theories, however, likely do not explain the entirety of the complex economic, political, and social factors involved in the creation of the Great Depression and its end.
Works Cited
"John Maynard Keynes," in Gale Encyclopedia of U.S. Economic History, ed. by Thomas Carson and Mary Bonk (Detroit, MI: Gale, 1999), Gale In Context: Biography, https://link.gale.com/apps/doc/K1667000104/BIC?u=vic_liberty&sid=bookmark-BIC&xid=c58d79cb.
Theodore Rosenof, "Keynesianism," in The Oxford Companion to United States History (Oxford, UK: Oxford University Press, 2001), https://www-oxfordreference-com.ezproxy.liberty.edu/view/10.1093/acref/9780195082098.001.0001/acref-9780195082098-e-0851.
Ibid.
Gary Wolfram, "Keynesian Economics and the Great Depression" (lecture, Hillsdale College, online, October 19, 2015).
Joseph A. McCartin, "The New Deal Era," in The Oxford Companion to United States History (Oxford, UK: Oxford University Press, 2001), https://www-oxfordreference-com.ezproxy.liberty.edu/view/10.1093/acref/9780195082098.001.0001/acref-9780195082098-e-1103.
John Maynard Keynes, The General Theory of Employment, Interest, and Money (Palgrave MacMillan, 2018): 337.
Eugene N. White, "The Stock Market Boom and Crash of 1929 Revisited," The Journal of Economic Perspectives 4, no. 2 (Spring 1990): 72.
Keynes, The General Theory, 139.
Wolfram, "Keynesian Economics."