What’s in This Chapter?

The theories of John Maynard Keynes became increasingly popular as the problems of the Great Depression of the 1930s became more serious. The economy was experiencing a significant downward spiral, and people were desperate for a solution. Keynes supported active government involvement primarily in the form of increased government spending, and an expansive monetary policy by the Federal Reserve System.

Classical economists disagreed with this approach. They believed that government involvement had already significantly increased during the 1920s and early 1930s, especially in the area of monetary policy, various regulations including anti-trust and labor laws, and international tariffs and quotas. They blamed the severity of the Great Depression on errant government policies before and during the Great Depression. Their solution was less government involvement, less government spending, lower taxes, fewer regulations, and more reliance on free market corrections. According to classical economists, allowing free market forces to correct the problems of the 1930s would mean struggles in the short run but a stronger and healthier economy in the long run. Keynes cared more about immediate problems and stimulating the short run and responded: “in the long run, we are all dead”.