VERY BASIC IDEAS FOR AN OVERVIEW ON ECONOMICS
Liberalism
First published Thu Nov 28, 1996; substantive revision Thu Sep 16, 2010
As soon as one examines it, ‘liberalism’ fractures into a variety of types and competing visions. In this entry we focus on debates within the liberal tradition. We begin by (1) examining different interpretations of liberalism's core commitment — liberty. We then consider (2) the longstanding debate between the ‘old’ and the ‘new’ liberalism. In section (3) we turn to the more recent controversy about whether liberalism is a ‘comprehensive’ or a ‘political’ doctrine. We close in (4) by considering disagreements as to ‘the reach’ of liberalism — does it apply to all humankind, and must all political communities be liberal?
Liberal political theory, then, fractures over the conception of liberty. But a more important division concerns the place of private property and the market order. For classical liberals — sometimes called the ‘old’ liberalism — liberty and private property are intimately related.
From the eighteenth century right up to today, classical liberals have insisted that an economic system based on private property is uniquely consistent with individual liberty, allowing each to live her life —including employing her labor and her capital — as she sees fit.
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century, and is used in the 21st century as an example of how far the world's economy can decline. The depression originated in the United States, starting with the stock market crash of October 29, 1929 (known as Black Tuesday), but quickly spread to almost every country in the world.
The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped, and international trade plunged by a half to two-thirds. Unemployment in the United States rose to 25%, and in some countries rose as high as 33%..Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60 percent.[ Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most.
Countries started to recover by the mid-1930s, but in many cases the negative effects of the Great Depression lasted until the start of World War II.
There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Milton Friedman) point to monetary factors such as actions by the US Federal Reserve that contracted the money supply. Recessions and business cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a normal recession or 'ordinary' business cycle into an actual depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply. Those who believe in a large role for the state in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.
New Deal
The New Deal was a series of economic programs passed by Congress during the first term of Franklin Delano Roosevelt, 32nd President of the United States, from 1933 to his reelection in 1936. The programs were responses to the Great Depression, and focused on what historians call the "3 Rs": relief, recovery and reform. That is, relief for the unemployed and poor; recovery of the economy to normal levels; and reform of the financial system to prevent a repeat depression. The New Deal produced a political realignment, making the Democratic party the majority, with its base in liberal ideas, big city machines, and newly empowered labor unions, ethnic minorities, and the white South. The Republicans were split, either opposing the entire New Deal as an enemy of business and growth, or accepting some of it and promising to make it more efficient. The realignment crystallized into the New Deal Coalition that dominated most American elections into the 1960s, while the opposition Conservative Coalition largely controlled Congress from 1937 to 1964. Few new programs were enacted after 1936, and many agencies were disbanded during World War II.
Historians distinguish a "First New Deal" (1933) and a "Second New Deal" (1934–36). Some programs were declared unconstitutional, and others were repealed during World War II; in early 1937 almost no new programs were initiated because of the opposition of the new Conservative Coalition.
The "First New Deal" (1933) dealt with groups; from banking and railroads to industry and farming, all of which demanded help for economic recovery. A "Second New Deal" in 1934-36 included the Wagner Act to promote labor unions, the Works Progress Administration (WPA) relief program, the Social Security Act, and new programs to aid tenant farmers and migrant workers.
Bank and monetary reforms
With strident language Roosevelt took credit for dethroning the bankers he alleged had caused the debacle. On March 4, 1933, in his first inaugural address, he proclaimed:
"Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . . . The money changers have fled from their high seats in the temple of our civilization."
He closed all the banks in the country and kept them all closed until he could pass new legislation. On March 9, Roosevelt sent to Congress the Emergency Banking Act, drafted in large part by Hoover's top advisors. The act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks.
Women and the New Deal
During these first days, the New Deal created programs primarily for men. It was assumed that the husband was the "breadwinner" (the provider) and if they had jobs, whole families would benefit. It was the social norm for women to give up jobs when they married; in many states there were laws that prevented both husband and wife holding regular jobs with the government. So too in the relief world, it was rare for both husband and wife to have a relief job on FERA or the WPA. This prevailing social norm of the breadwinner failed to take into account the numerous households headed by women. The first projects of the New Deal only hired men, but it soon became clear that the government needed to help women as well.
Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist, statistician, and a recipient of the Nobel Memorial Prize in Economics. As a professor of the Chicago School of Economics, based at the University of Chicago, he had great influence in determining the research agenda of the entire profession. Friedman's many monographs, books, scholarly articles, papers, magazine columns, television programs, videos and lectures cover a broad range of topics of microeconomics, macroeconomics, economic history, and public policy issues. The Economist magazine praised him as "the most influential economist of the second half of the 20th century…possibly of all of it".
During the 1960s he promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural rate of unemployment" and he argued the central government could not micromanage the economy because people would realize what the government was doing and change their behavior to neutralize such policies. He predicted that Keynesian policies then existing would cause "stagflation" (high inflation and minimal growth). Friedman's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of Keynes, who argued that monetary policy is ineffective during depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to decrease mass unemployment. Milton Friedman was a major proponent of a volunteer military, stating that the draft was "inconsistent with a free society". In Capitalism and Freedom, he argued that conscription is inequitable and arbitrary, preventing young men to shape their lives as they see fit. During the Nixon administration he headed the committee to research a conversion to paid/volunteer armed force. He would later state that his role in eliminating the conscription in the United States was his proudest accomplishment. Friedman did, however, believe a nation could compel military training as a reserve in case of war time.
He served as a member of President Reagan's Economic Policy Advisory Board during 1981. During 1988, he received the Presidential Medal of Freedom and the National Medal of Science. He said, "I think the term classical liberal is also (…) applicable. I don't really care very much what I'm called. I'm much more interested in having people thinking about the ideas, rather than the person."
Friedman was supportive of the state provision of some public goods that private businesses are not considered as being able to provide. However, he argued that many of the services performed by government could be performed better by the private sector. Above all, if some public goods are provided by the state, he believed that they should not be a legal monopoly where private competition is prohibited. For, example, in response to the United States Post Office's legal monopoly of mail, he said
There is no way to justify our present public monopoly of the post office. It may be argued that the carrying of mail is a technical monopoly and that a government monopoly is the least of evils. Along these lines, one could perhaps justify a government post office, but not the present law, which makes it illegal for anybody else to carry the mail. If the delivery of mail is a technical monopoly, no one else will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter.
—Milton Friedman,Friedman, Milton & Rose D. Capitalism and Freedom, University of Chicago Press, 1982, 29
Friedman made newspaper headlines by proposing a negative income tax to replace the existing welfare system, and then opposing a bill to implement it because the bill merely proposed to supplement the existing system rather than replace it.
During 2005, Friedman and more than 500 other economists advocated discussions regarding the economic benefits of the legalization of marijuana.
John Maynard Keynes, 1st Baron Keynes, 5 June 1883 – 21 April 1946) was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, and the economic policies of governments. He identified the causes of business cycles, and advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.
In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would automatically provide full employment as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand (in macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics was so resounding that almost all capitalist governments adopted its policy recommendations.
Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the Anglo-American economies from the start of the decade, and partly due to critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. However, the advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought. Keynesian economics has provided the theoretical underpinning for the economic policies of President Barack Obama of the United States, former Prime Minister Gordon Brown of the United Kingdom, and other global leaders to ease the late 2000s economic recession.
In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century, commenting that; "His radical idea that governments should spend money they don't have may have saved capitalism".[6] In addition to being an economist, Keynes was also a civil servant, a patron of the arts, a director of the Bank of England, an advisor to several charitable trusts, a writer, a private investor, an art collector, and a farmer.
Economics: the Keynesian resurgence of 2008–2009
The Financial crisis of 2007–2010 led to public scepticism about the free market consensus even from some on the economic right. In March 2008, Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism. In the same month macroeconomist James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises. A series of major bail-outs were pursued during the financial crisis, starting on 7 September with the announcement that the U.S. government was to nationalize the two government-sponsored enterprises which oversaw most of the U.S. subprime mortgage market—Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought. Similar policies have been adopted by other governments worldwide. Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the International Monetary Fund and the World Bank, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out. IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus.
By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades" In December 2008, Paul Krugman released his book, The Return of Depression Economics and the Crisis of 2008, arguing that economic conditions similar to that which existed during the earlier part of the century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009 Shiller and George Akerlof published Animal Spirits, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behaviour of businessmen and other economic agents.
While the need for stimulus measures has been broadly accepted among policy makers, there has been much debate over how to fund the spending. Some leaders and institutions such as Angela Merkel and the European Central Bank have expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery. Among professional economists the revival of Keynesian economics has been even more divisive with over 300 economists signing a petition stating that they do not believe higher government spending will help the United States's economy and some senior figures such as Robert Lucas remaining sceptical whether stimulus packages can work at all.