Timeless economics

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Posts Tagged ‘Great Depression

The Unsung Hero of the Great Depression

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It was in the profundity of the Great Depression when the economist from Cambridge, England, John Maynard Keynes wrote his opus magnum entitled “The General Theory of Employment, Interest and Money.”

It was his simple solution for the financial crisis in 1929 when the economy was at its low. Keynes’ theory, also called Keynesian Economics, was based on the circular flow money where one person’s spending is another person’s earnings. Consumption motivates production, production creates employment, employment provides income, and income will enable consumption. This cycle will continue as long as people will spend rather than save which was contrary to Keynes’ solution by priming the pump. Keynes simply explains that since people during the Great Depression tends to save rather than spend, this will put the economy at standstill for in Keynes’ words, “..the engine which drives enterprise is not thrift, but profit.”

Keynes also argued that the government should intervene during this economic downturn by either increasing the supply of money or by doing the spending itself and buying goods from the market. This was somewhat a contrary to a preceding economic belief of the laissez-fair where the government should not interfere with the market. Keynes theory rooted to skeptical reactions until the outburst of the World War II where massive spendings on war initiated government to spend and inject money into the economy. And with this Keynes’ prediction came true as foreseen.

Nowadays, people do not know who Keynes was and what a great school of thought he established in economics.

Written by jethrojedsamsoncadiz

March 23, 2009 at 11:57 PM