152
I
n the years following World
War I confidence in traditional
economic thinking was put to
the test by events in Europe and
North America. Social and political
unrest had led to a communist
revolution in Russia while
hyperinflation had made the
German economy collapse.
During the 1920s the US
enjoyed such prosperity that in 1928
President Herbert Hoover said, “We
in America are nearer to the final
triumph over poverty than ever
before in the history of any land.”
One year later the Wall Street
Crash took place: shares collapsed
and thousands of firms folded.
By 1932, more than 13 million
Americans were unemployed. The
US recalled the huge loans they
had previously made to Europe,
and European banks collapsed. For
much of the decade, many countries
worldwide were in a severe
depression. It was during this period
that the British economist Lionel
Robbins formulated his often-quoted
definition of economics as “the
science of scarce resources.”A new approach
Trust in the free market’s ability to
provide stability and growth was
shaken, and economists looked for
new strategies to tackle economic
ills, particularly unemployment.
Some began to examine the
institutional problems of developed
capitalist economies. US economists
Adolf Berle and Gardiner Means, for
example, showed how managers
were running corporations for their
own benefit rather than for the
firm’s. The most pressing need was
to find a means of stimulating theeconomy, for which a completely
new approach was needed. The
answer came from British economist
John Maynard Keynes (p.161), who
recognized the failings of a totally
free market—one that is untouched
by any form of intervention. Where
previous generations had trusted the
market’s own workings to right
the system’s shortcomings, Keynes
advocated state intervention, and
specifically government spending,
to boost demand and lift economies
out of depression.
At first his ideas were met with
skepticism, but they later gained
support. His model envisioned the
economy as a machine that could
be regulated by governments
through adjusting variables such
as the money supply and public
spending. In 1933, Keynes’s
arguments provided a rationale forINTRODUCTION
1929
1929
1931
1933
1930
1932
1933
1931
The Gold Standard
(a monetary system that
linked the value of each
country’s currency to
gold) is suspended.The Wall Street Crash
(a dramatic fall in the
value of stocks and
shares in the US)
marks the beginning of
the Great Depression.Friedrich Hayek
argues that state
interference in
economies is wrong
and will ultimately
lead to repression.The Econometric
Society is founded in
the US to research the
mathematical and
statistical aspects
of economics.Lionel Robbins
formulates his definition
of economics as “the
science of scarce
resources.”Joseph Stalin
announces
the compulsory
collectivization
of farming in the
Soviet Union.John Maynard Keynes
writes an open letter to
President Roosevelt in
The New York Times,
recommending government
spending to kick-start
the economy.Ragnar Frisch makes
the distinction between
macroeconomics and
microeconomics.