Keynesian Economics, New Deal, and Post-War Economic Concepts
Keynesian Proposal
Keynes’ diagnosis of the 1929 crisis identified the main problem as a lack of demand leading to the economic collapse of investment. Faced with the decline of private investment, he proposed that the state should increase public spending, mainly on public works. The deficit generated if state spending increased would be offset because this initial expenditure would create new demand (the Keynesian multiplier). Thus, to increase total production, the state could increase taxes on incomes or even cancel the initial deficit in the medium term.
New Deal
This was a plan implemented by Franklin Delano Roosevelt to overcome the economic crisis and mitigate its social effects. Key measures included:
- The Agricultural Adjustment Act aimed to reduce agricultural output so that prices would recover.
- The National Industrial Recovery Act (NIRA) promoted agreements between companies to prevent price reductions and to promote infrastructure projects that would reduce unemployment and increase demand.
- Finally, a monetary policy was launched that devalued the dollar by 40% in 1934.
The National Labor Relations Act of 1933 recognized freedom of association and the right of companies to collective wage bargaining. The government established a minimum wage and a maximum number of weekly working hours. A month later, a law creating Social Security was passed. Many businesses were not in favor of Roosevelt’s proposals. Mistrust of entrepreneurs and businesses led to a seclusion that meant private investments were even more scarce, leading to a new recession in 1936-37.
Post-War Economic Concepts
War Debts
Debts incurred during the First World War by countries involved in the conflict.
Reparations
Payments to repair the destruction carried out during the war. Germany was the country most affected by this policy.
Durable Goods
Consumer goods that have permanence in time; they are not for immediate consumption.
Inflation
An imbalance between prices and wages. Prices rise, but wages do not.
Speculative Bubble
A market situation in which increased demand for a particular asset causes an increase in its price. One problem is that investors often buy shares by contracting debts.
Trade War
Europe considered the imposition of protectionist trade tariffs by the U.S. in 1930 a declaration of war.
Liquidity Crisis
A situation in which there is a lack of financial resources to meet the payment of debts, often caused by a stock market crash.
Deflation
An economic situation in which there is a general fall in prices and wages. A decrease in prices leads to an increase in the purchasing power of a country’s currency.
Keynesian Multiplier
This is part of Keynes’ economic theory, and its approaches are based on increased public spending, especially on public works. The initial expenditure, transformed into goods and wages, generates new demand in various economic sectors.
Stockholm School
Advocated for the active role of the state budget to combat economic recession, making it an instrument against crises.
Autarky Economy
Self-sufficiency that allows the survival of a country irrespective of exports, producing everything it needs internally.