Can socialism survive the twenty-first century?
It is 1923-29 and the US economy is enjoying a period of abundant economic prosperity.
Industrial production has doubled & the National Income and Per Capita Income has
increased substantially. This led to an increase in speculation during these boom years. All
big and small investors have invested in the stock market for quick returns to gains. The
number of shares enlisted in the New York stock exchange increased from about 44 crores
in 1925 to about 100 crores in 1929. The average stock prices rising and stocks are selling at
a price 50 times higher than the face value in 1929. However, within less than a year, the US
finds its’s boon exploded and the economy entering into a severe Depression. What went wrong?
Many economists believe that the sudden fancy for the stock market by Americans is to be at blame. More so because there existed speculative transactions in stocks without any corresponding growth in real goods. Therefore, these rising stock prices could not sustain themselves, leading to the infamous Stock Market Crash of the US in 1929 which eventually led to The Great Depression. Some economists cite several other flaws in the US economy which resulted in the Depression, including the following ones:
1. Uneven Distribution of prosperity
2. Slow growth in purchasing power of common people
3. Poor growth in agriculture
4. Uneven prosperity in rural and urban sectors
5. Growing unemployment
6. Weakness in the international economy
7. Weakness in banking structure
However, the Stock Market Crash becomes the ultimate result of all the points cited.
It was John Maynard Keynes who eventually came to the rescue of the grave situation the US was faced with at that time. By sending an open letter to President Roosevelt stating several economic methods, which came to be known as The New Deal, which would lead America to defeat the Economic Depression. The most useful part of the New Deal programme was ‘‘pump-priming’’. It aimed at generating excess demand in the economy through government spending.
One of the several ways ‘pump priming’ worked under the ‘’New Deal’’ was increasing government purchases. The US presidential government increased their general rate of hiring teachers, road building & construction, and several others. Tax cuts were also another key formula to stimulate the demand in the economy by increasing the real income of people. Keynes suggested that the cause of the Great Depression was only due to falling in consumer spending and therefore an exact inverse of it would be the best method of reviving the economy. Therefore, the gateway out of it was to increase consumer spending. Following this, a phenomenon called ‘’Planned Scarcity’’ was put into action. According to Keynes, all these policies had a multiplier effect on the economy which is written as
change in GDP = multiplier × change in autonomous spending.
The diagram of which can be represented as:
When the government increases its government spending, even though the initial increase in demand rises as the demand curve shifts from AD1 to AD2, it is followed by an even further shift of the demand curve to AD3 whilst increasing the output of the economy from Y1 to Y3, showing the profound effects of the multiplier.
This is how Keynes reformed the idea of mainstream economics by shattering classical economics into pieces and introducing the inception of Keynesian Economics, the tools of which are still used today.
Coming to recent times, we are standing at a situation analogous to the one in 1929, considering how badly the economies have been hit globally. However, a seeming contradiction of the above policies has been observed in recent times in the USA where a shortage of workers can be noticed which has taken economists by surprise considering the initial economic shock of the pandemic. Tracing it back, it has been inferred that POTUS Joe Biden’s unemployment/welfare benefits motivated/inspired by Keynesian Economics are to be at blame. A moderate amount of cash transferred to the unemployed has incentivized the poor to stay at home. The information that has further created an even bigger shock to economists is that despite the drive-in wages amidst a contraction in the economy, the workers are still in a dilemma to return to work. Economists and policymakers believe that this situation might affect the long-term growth and developmental goals of the US. While one school of thought is persuasive that cutting welfare benefits can only bring them to work, while another school of thought believes that it should be continued because the benefits are being used to generate demand which would recover the economy in the long run. It has also been observed that the poor are using the welfare benefits to invest in small businesses which may have amazing benefits in the future. A large proportion of economists do think that the workforce is indecisive about getting back to work considering the several risks underlying them. However, the true reason whether this behavior is permanent or temporary remains ambiguous on whether Keynesian Economics would survive the 21st century in a perceived post-pandemic world.