The New New Thing in Economics

The Great Depression brought John Maynard Keynes to the forefront of economic thought. The key "Keynesian" insight was that private investment spending is inherently unstable--due to fads and fashions among investors, or because of shifts in the "animal spirits" of businessmen, or because falling prices disrupt the financial system.

Keynesians thought that prudent monetary policy--central banks raising and lowering interest rates to diminish fluctuations in private investment spending--could go part of the way toward stabilizing the economy. But they also believed that government had to be willing to step in directly, through expansive fiscal policy, to keep the overall level of spending in an economy stable. Such a policy, they believed, would forever banish the specter of large-scale mass unemployment, as in the Great Depression. Moreover, near-full employment might effectively be guaranteed.

The Keynesians foresaw that near-full employment raised the threat of inflation. After all, why should workers and unions moderate wage demands if governments will boost spending whenever high unemployment looms? One big curb on high wage demands--fear of being let go when unemployment rises--was gone. What would replace it?

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.


Log in;