Introduction
Keynesianism is also referred to as demand-side economics is an economic theory that focuses on total spending by the government and its effects on inflation (Hall, 1989). The approach was developed as an attempt to curb the great depression, and it advocates for the use of fiscal policies such as increased government spending and lowering taxes as ways of stimulating the economy (Berish, n.d). On the other hand, neoliberalism is an economic policy where the government transfers control of economic factors to the private sector (Harvey, 2007). The theory builds on economic principles of free markets where the government limits subsidies, open up markets for trade, limit protectionism, and doing away with fixed exchange rates (Monbiot, 2016).
The Great Depression
The great depression is a period of low economic performance that begun about 1929 and hit rock bottom at about 1933/ during this period, GDPs of most countries went down by nearly 30% per capita disposable income went down by almost 40% (Barile, 2018). More than 85000 businesses failed (Barile, 2018). One of the primary culprits of the great depression was low aggregate demand as a result of low investment levels (Romer, 1993). Other factors such as the stock market crash of 1929 are also linked to the start of the great depression (White, 1990).
Government Reactions
Additionally, as consumption and income went down, so did the revenues collected by governments. Governments, therefore, reacted by raising tax levels (New World Economics, 2010). The rise in taxation further reduced consumption and aggregate demand (New World Economics, 2010). What was the solution for bringing the great depression to an end? Keynesianism was developed as a tool to help governments bring back their economies to full potential during the latter stages of the great depression. However, most of the suggestions in Keynesianism were not fully implemented until after World War II (Riley, 2014). A policy that helps begin the turning around of economic fortunes was the increased government spending on the military. Most policies suggested under Keynesianism were put into full use in the Post War Economic Boom (Higgs, 2001).
The Postwar Economic Boom
The development of the Postwar Economic Boom was fueled in part by the pent-up consumer demand that was there before and during the war (US Department of State, 2018). Industries that had stalled such as the automobile industry were able to be successfully revived, and there was the development of new industries such as the aviation and electronics industry. Additionally, there was a boom in housing, which stimulated mostly by the affordable mortgages made available to returning war veterans (Marx, 2018). The number of consumers increased with the birth of baby boomers. During the war, there was massive development in military-industrial complexes as there was a need to manufacture supplies for the war (Davis, 2018). Some Keynesian policies that are responsible for the boom include increased expenditure, as consumption on durable goods more than doubled while real consumption rose by 22% between 1944 and 1947(Tassava, n.d). On the private sector, there was increased production as factories that were held by the government during the war to produce ammunition were now in the hands of the private sector and contributed a significant sum to the GDP (Jaworski, 2017).
The Turbulence of the 1970s
The turbulence of the 1970s is a period characterized by rising energy prices, declining profitability and productivity, soaring inflation and high unemployment rates (Reuss, 2009). Most governments experienced deficits that persisted throughout the 1970s. In the United States, the period was characterized by rising competition from European countries due to the spread of capitalism (Marglin, and Schor, 1990). Additionally, US companies were no longer able to access cheap raw materials from the south due to the resistance of US policies there (Raymond, 2016). The crisis marked the beginning of the neoliberal era as there was the development of policies that were against government intervention in the economy, and welfare programs. The economic and moral decay was blamed on government regulation, social programs, and taxation (Packer, 2013).
The Rise of Neoliberalism
During the beginning of the 1980s, there were campaigns in both Britain and the United States advocating for the adoption of free markets with no government interference (Patel, and Moore, 2017). The state was viewed as the source of all economic evil, and it was believed that the economy would perform much better under the control of the private sector. Both the Reagan and Thatcher administrations favored the doing away with state-controlled institutions and privatization and deregulation for the creation of free markets (Deeds, 1986). Adoption of neoliberal policies was a result of failing state control socialist programs and Keynesian policies. Passage of the neoliberal policies led to a period of economic stability in the United States referred to as The Great Moderation (Lavoie, 2018). The period was characterized by vast financial stability where standard deviations in inflation and quarterly real GDPs vastly reduced. Good monetary policies are primarily attributed to being behind The Great Moderation, as during this period there were better monetary policies with a focus on price stability being a priority ("Monetary Policy in the Economic and Monetary Union," n.d).
The Global Economic Crisis of 2007 and 2008
The global economic crisis of 2007 and 2008 is considered to be the worst economic crisis since the great depression (Domitrovic, 2013). Factors that are accused of causing the depression include a drop in housing prices, a phenomenon that was witnessed as early as 2006 ("From Great Depression to Great Recession," 2017). Some policies that were put in place by governments to avert the problem included the creation of the Troubled Asset Relief Program in Britain. The program was tasked with recapitalizing the financial sector and preventing further escalation of the crisis (Mason, 2016). Also, there was the guarantee of mutual funds by treasury departments to stop the institutional run that was being witnessed at the time (Serchuk, 2009). There was a guarantee by the Federal Deposit Insurance Corporation for senior bank debts, a fact that restored confidence in the lending markets. The period after the great economic crisis of 2008 is characterized by stagnating economies in many parts of the world, mainly the UK (Varoufakis, 2017). The stagnation is now considered to be normal since it has been there for a while and doesn't seem to be going away.
Conclusion
In conclusion, various economic principles and theories are often used by governments that want to drag their countries out of economic depressions. The Keynesian theories were formulated during the 1930s and were used as a model for overcoming The Great Depression at that time. Neoliberalism developed in the 1970s and 1980s and was used to address the failures that resulted from the adoption of Keynesian policies.
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