Economic Theories and The Great Depression

John Maynard Keynes proposed a theory that is called the Keynesian Economic Theory. Keynes blamed the Stock Market Crash of 1929, which led to the Great Depression, on several vital factors. However, Keynes failed to consider that people could not go forward using his method of keeping the United States out of the Great Depression. This article will examine his economic theory and how it would fail to work during this period.

Keynes would blame the Stock Market Crash of 1929 and the Great Depression that followed on several things. First, he would blame the lack of spending by households, businesses, and the United States government as the reason the Stock Market Crash became the Great Depression. According to Keynes, the lack of spending means that a person is saving rather than putting their money back into the market due to that person's understanding of the needs of themselves and their families (2022. p. 129). Yet, the Stock Market Crash of 1929 and the years that emanated after this event made it impossible for families to go out and spend. Henry Ford and the Ford Motor Company would increase pay to answer the crisis. According to "Ford Shops Return to $6-Day Minumum: Wage Reduction Admitted After Refusal to Discuss Reports in Effect Three Weeks Increase, Granted After 1929 Stock Market Crash, is Called "Depression Dollar"," Henry Ford would raise the minimum wage pay per day to “seven dollars a day” this was the solution that would happen after “meeting with President Herbert Hoover” after the 1929 Stock Market Crash (1931. para. 3) . This shows that people, even given a higher wage for a time, were not willing to risk overtly spending after such a time. This could partly be due to the high unemployment rate during this period.

One of the severe results of the Stock Market Crash of 1929 and the years after was its effects on employment. People will do what is necessary to ensure they and their families are cared for if they lose their jobs. Margo states, “Between 1929 and 1933 the unemployment increased by over 20 percentage points, according to the Lebergott series, or by 17 percentage points, according to the Darby series” (1993. p. 2). One failure of Keynes is to note that people placed in difficult positions will protect their families. Spending would not be a priority other than necessities. This is one reason Keynes's Economic Theory could not work during this time. Keynes made another point connected to the lack of spending.

The lack of spending would cause other problems that would result in reductions in production, falling incomes, and higher unemployment. According to Keynes, demand for a product is a direct relation to the production of the product (2022. p. 37). It cannot be argued that this falls under supply and demand. However, the falling income can be argued because, as mentioned earlier, Henry Ford did the opposite of lowering wages. Ford increased his wages for a time only to bring them back to normal levels a few years later. This was despite unemployment and the high numbers mentioned earlier.

Economic theory should be more comprehensive than what this theory and others like this theory put forth. The common man is a part of the system for economics to work well. Keynes needed to consider how people may react when the Stock Market Crashed in 1929. Keynes should not be singled out. The Austrian Economic Theory has its weaknesses. 

Ludwig Von Mises and Friedrich Hayek are the creators of the Austrian Economic Theory. The main fault of this theory is that it pushes for no government intervention in the economy. Why is this a fault? Neither Mises nor Hayek consider how people in power will act. This is not to say all people in power will act negatively. Both Keynes and Hayek failed to consider an aspect as a reason the Great Depression started. This third option came from Gustav Cassel, an economist living in Sweden. Cassel was looking at the world’s gold standard, a driving force in the economy during the 1920s. Irwin states, “The focus on Keynesians and Austrians overlooks a third school—the monetary approach of Cassel—whose interpretation of the period is much more consistent with the current analysis of the Great Depression that focuses on the mismanagement of the gold standard” (2014. p. 223). This is another way the Great Depression was looked at as starting. 

This is not a bashing of economic theory. Each theory has its value, and the problem is man. It is man who looks at one theory and says this is the only way an economy can work. Psalms 118:8 (NKJV) states, “It is better to trust in the Lord than to put confidence in man” (2005. p. 703). People put their trust in man when it comes to what will work and what will not work. The problem is here: many of these people only look at their theory as a workable theory. In truth, the only one who can make the economy whole and perfect is God. However, if one can put the working pieces of the theories together, maybe the economy could have worked better before and after the Great Depression.


References:


"Ford Shops Return to $6-Day Minumum: Wage Reduction Admitted After Refusal to Discuss Reports in Effect Three Weeks Increase, Granted After 1929 Stock Market Crash, is Called "Depression Dollar." The Sun (1837-), 1931 Oct 30, 1931/10/30/. 4, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/historical-newspapers/ford-shops-return-6-day-minimum/docview/543405930/se-2.


Irwin, Douglas A. "Who Anticipated the Great Depression? Gustav Cassel Versus Keynes and Hayek on the Interwar Gold Standard." Journal of Money, Credit and Banking 46, no. 1 (2014): 199-227. Retrieved from Who Anticipated the Great Depression? Gustav Cassel versus Keynes and Hayek on the Interwar Gold Standard (wiley.com).


Keynes, John Maynard. 2022. The General Theory of Employment, Interest and Money. Grapevine India. Kindle Edition.


Margo, Robert A. "Employment and Unemployment in the 1930s." The Journal of Economic Perspectives (1986-1998) 7, no. 2 (Spring 1993, 1993///Spring): 41, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/employment-unemployment-1930s/docview/208968895/se-2.


Stanley, F. Charles. 2005. Life Principles Bible (NKJV). Nashville. Thomas Nelson Publishing.

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