Keynesian Economics Essay

3786 Words Dec 25th, 2010 16 Pages


As early as 1848, Karl Marx indicated the inherent weakness of uncontrolled capitalist system guided by ruthless exploitation of labour. In the then prevailing ‘Mercantilist’ system combined with the ‘Gold Standard’, country’s wealth and power was dependent on export surplus. Export prices had to be kept low by low wages. Marx argued that creating supply while not creating purchasing power would lead to creation of ‘surplus value’. Economies would experience excess production, stock piling, down turn and periodic unemployment. Over time, the down turn would get worse.

For labour, having a job or being unemployed made little difference. Marx believed that periodic recession and crisis of capitalism
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Trade cycle and periodic recession and depression were considered as result of ‘rigidity’ in wage and price mechanism. For smooth functioning of the economy, their recommendations were.

• Let there be complete free market • Let there be complete flexibility in wages and prices. • Let the government not meddle with economy and keeps its involvement to only issues related to law and order and defense.

[It is noteworthy that the concept of laissez faire and supply creating its own demand was echoed again in 1970s by Chicago School of ‘supply side’ economics. Least government interference, free market economy, deregulation, reduced taxes propelled economics of US President Reagan and British Prime Minister Margaret Thatcher. Collapse of communism in USSR and East European countries gave additional strength to supply side economics. World was to go on two decades of ‘growth binge’ creating ‘bubbles’ whose bursting has, since 2007, put the global economy in its peril.]

Great Depression of 1929, originating with a severe and quick fall in stock prices on the Wall Street, proved wrong the assumption of self-correcting processes of free market and natural prevalence of full employment. In four years 1929 – 1933, the unemployment rate in the USA increased to 25 %, in Great Britain and Germany to 33 %. It was out of depression that

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