As early as 1919, the famous economist John Maynard Keynes glimpsed the precariousness of the Victorian and post-Victorian laissez-fair arrangements to which he was born. The calamity of the Great Depression clarified for Keynes a need for more intelligent public policy and more conscious direction of economic affairs. The path to his famous essay the General Theory was really a search for increased rationality in economic policy. Keynesian economics is essentially a way in which an alert government, by taking thought, can tame the business cycle and alleviate the miseries of personal insecurities. If Keynes could be said to have possessed an ideology, it was a confidence born of the humane Locke-Hume-Mill tradition that intelligence in human affairs is both essential and possible." (Lekachman 1966)
Since 1980, when Ronald Reagan revived neo-classical economics with it's invisible self correcting mythological hand of tax cuts, labor cuts and deregulation as promoted by Milton Friedman; we are witnessing the effects on the global economy in a spectacular collapse unprecedented since the Great Depression.
Laissez faire may have been the logical answer for 18th Century mercantilist England and 19th Century expansionist United States but by no means was this the best solution for the future woes to come in the more advanced and industrialized global economies of the 20th century and certainly not the innovative and complex technological revolution of the 1990's into the current 21st century.
As Keynes himself stated,
‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when the enterprise becomes the bubble on the whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measures attained on Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism’
Wow. So relevant today, a statement from 75 years ago. However, the discussion becomes clouded and diluted by a cacaphony of voices from the capitalists and their right winged media that this administration has failed after 50 days by attempting to introduce Keynesian "socialism".
One of the clarion Republican demands was/is to balance the budget. History has shown that this is the last and most disastrous policies that can be done during an economic crisis. It could be said, Herbert Hoover cut spending and reduced the deficit which turned a bank panic into the Great Depression. The issue is increasing aggregate demand so people get back to work, start paying taxes and increase consumer spending.
Historians tendency to reduce the crisis of the 1930's and the Great Depression to a series of impersonal events – the stock market crash, unemployment, mortgage foreclosures, bank failures- obscures the reality of these disasters as people experienced them in homelessness, displacement and abject poverty.
Ben Bernanke the current Fed chairman captures a snapshot of historic perspective from the fight of Democrats and reformers during the great depression.
"During 1930-1933 the US financial system experienced conditions that were among the most difficult and chaotic in its history. Wave of bank failures culminated in the shutdown of the banking system in March 1933. On the other side of the ledger, exceptionally high rates of default and bankruptcy affected every class of borrower except the federal government. An interesting aspect of the general financial crises- most clearly of the bank failures – was their coincidence in timing with adverse developments in the macroeconomy. Notably, an apparent attempt at recovery from the 1929-30 recession was stalled at the time of the first banking crisis (November-December 1930), the incipient recovery degenerated into a new slump during the mid 1931 panics, and the economy and financial system both reached their respective lows at the time of bank holiday of March 1933. Only with the New Deal’s rehabilitation of the financial system in 1933-1935 did the economy begin its slow emergence from the Great Depression" (Bernanke 1983)
By voting Democratic and supporting the New Deal, many workers felt that they were affirming rather than denying their class status. American society was polarized enough during the Great Depression that workers could feel that supporting a sympathetic mainstream party like the Democrats was a way of pursuing their class interests. Many even went so far as to consider the Democratic Party a workers’ party. One might wonder if workers during the Depression were really deceiving themselves in believing the Democratic Party really had their best interests at heart. But many of their experiences reinforced that view.
Foremost was the political language that Roosevelt used. It was the president of the United States, for example, not some rabble-rousing radical, who pledged himself when accepting his party’s nomination in 1936 to take on the ‘economic royalists’ who were fast creating a ‘new industrial dictatorship’ that autocratically set the conditions of labor. ‘Private enterprise’ had become ‘privileged enterprise’. At many other times as well, workers heard Roosevelt lash out at their bosses and commit himself to ‘protect the common’ man and woman.
The Republicans only helped FDR’s image as the working person’s president, determined to turn things upside down, by lambasting the New Deal as a dangerous break from the past, ‘one that is alien to everything this country has ever known before.’
They called it socialism when they tried to create new public works jobs. They were communists who spent on the infrastructure. Marxists and Leninists who advocated for labor and wages.
Some things never change and history contains no relevant information for the true believers in laissez-faire disaster capitalism.
Only when we begin to emerge from this economic shock by throwing the policies of Milton Freidman onto the ash heaps of disaster capitalism, will the majority of common people know of the Keynesian policies that have guided American economics up until Reagan.
I believe that large increases in federal government spending that are monetized by the Fed and the banking system will result in a recovery in real economic activity. When that recovery sets in depends on how quickly the federal government increases its spending and by the magnitude of that increase. We can debate whether tax rates should be cut or federal spending should be increased. We can debate what kinds of spending should be increased. We can debate whether the federal government should increase any of its spending. But the facts of the 1930s appear to be pretty clear - monetized increased federal government spending does result in increased real economic activity in the short run.
The economic data are likely to be abysmal through the first half of this year. The popular media will reinforce the gloom of the data. The same pundits who did not see this downturn coming will not see the recovery coming either.
My advice? Ignore the pundits and Republicans. We should push for national health care next. Just like Social Security was the cause celebre in 1933 of our grandparents, (thank you) so will Universal Health Care be the crowning acheivement of this generation.