CS Question #1: Why did Keynes object to the Treaty of Versailles?

The worldwide depression of the 1930s, known as the Great Depression, bewildered the economists and policymakers. They could not understand how the economies of most nations were failing. Before this depression, the economic position was one of laissez-faire. This is a French term that means a government should take a "hands-off" approach and not attempt to manipulate the economy. Economists and governments believed that time and nature would solve any long lasting economic failure. They felt that the free market was the only way to restore and gain economic stability. Their position was that unemployment was a problem of the unemployed. After all, the unemployed could get jobs if they worked for lower wages. They also felt that businesses could increase their sales by cutting prices. Although some workers and businesses would eventually be wiped out, prosperity and higher wages would eventually return. However, the reality of this depression was proving their theories wrong. As time passed, economic conditions only worsened.

Keynes looked at the economic situation of the Great Depression and had a revolutionary thought. In 1935, he wrote a book called The General Theory of Employment, Interest and Money to express his new views. Keynes felt that in order to recover a failing economy, the government must intervene. He made two important assertions. The first was that unemployed workers were not at fault for being out of work. He pointed out that during a depression, there is no wage low enough to eliminate unemployment. The second idea focused on the origins of unemployment and depression. He stated that consumers were limited in their spending due to the size of their incomes. Therefore, they have little influence on the business cycle. The dynamic actors in an economy are the investors and the governments. These two groups are the major contributors to the economy. After these two propositions, Keynes explained how governments and investors could work to recover the failed economies and return prosperity to the people.

CS Question #3: What were the two major theories proposed by Keynes?

His advice to end the Great Depression was for the government to take monetary and fiscal action to solve the crisis. He believed that government should become a stabilizing force in the economy. Many governments acted upon the advice of Keynes. Their actions created the basis for economic recovery. The British and U.S. governments both outlined their responsibilities for creating healthy economies. The U.S. Full Employment Act, along with other laws and policies, worked to spur economic growth in the United States. The government invested in the economy by spending money to create new businesses. It also created public works and encouraged private investment. Without government intervention, Keynes saw no solution to the crisis of the Great Depression. However, with his Stabilization Theory he marked out a new direction for economics.

CS Question #4: What is Keynes' Stabilization Theory?

Further Thought:

1. Why were the proposals suggested by Keynes considered revolutionary?
2. How do actions taken by a nation's government affect its economy?
3. What actions can a government take to stabilize an economy?