rest rates did fall, and yet output continued to sink further, while the unemployment rate soared well beyond any level justified as voluntary. The traditional catalysts for economic growth, consumption, investment, and international trade were in a catatonic state. Massive unemployment, coupled with a devastating loss in wealth, left consumption moribund. Businesses had no reason to invest in expanding productive capacity when demand for their goods and services had fallen off a cliff. Finally, the Smoot-Hawley tariffs led to a substantial contraction in foreign trade activity and potential export markets in countries that were doing better economically. This left only one sector of aggregate demand with the potential to resurrect the economy: government spending. John Keynes pointed out the obvious - when traditional methods of economic stimulus fail, use the government as a last resort and use it forcefully. Keynes was an economist educated by classical scholars. He took their theory a step further and exposed the shortcoming, establishing his own ideas on the classical foundation and leaving his own school of economic thought and policy. Keynes pointed out several problems with classical theory. An important point was that wages tended to be sticky and would not fall as much as prices during economic downturns. The result is an increase in real wages (w/p) and a decrease in the demand for labor as the real cost of labor inputs increases. Keynes also developed the idea that during periods of economic weakness investment tends to be relatively interest-inelastic, or investment is relatively unresponsive to changes in the interest rate. Thus, a decrease in the rate of interest will have little or no stimulative impact on the investment component of aggregate demand. ____________________________________________My conclusion is simple. In addition to their strong moral base in personal freedom, capitalism and competitive markets work to ...
