The 20th century: how much should governments do?
The Keynesian revolution
The problem
In the Great Depression of the 1930s, a quarter of American workers had no job.
Keynes's answer
The General Theory (1936): spending, not supply, drives output; markets can stay stuck with high unemployment.
The policy
Governments should spend more and tax less in a slump to raise demand.
The points to remember
- Keynes: in a slump, demand is too low, so government should spend.
- This created macroeconomic policy.
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In the 1970s, inflation and unemployment rose together, and a counter revolution began.
Keynesian
- Markets can stay stuck in a slump.
- Government spending raises output and jobs.
- Unemployment is the main danger.
Monetarist and new classical
- Markets correct themselves.
- Too much money causes inflation (Friedman).
- Keep government small; control the money supply.
The points to remember
- Stagflation in the 1970s weakened Keynesian ideas.
- Monetarists: control the money supply.
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Explain the differences between Keynesian and monetarist views of the role of government in the economy.
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