Keynes’s masterwork, The General Theory of Employment, Interest and Money, appeared in 1936. It is one of the most influential books written in the twentieth century.
FIGURE 28.1
The Rate of Inflation (consumer price index) in the United States, 1950-2011
Sources: Historical Statistics 2006, Table Cc1-2; and Economic Report of the President 2012, Table B60.
FIGURE 28.2
The Civilian Unemployment Rate, 1950-2007
Source: Economic Report of the President 2012, Table B36.
For more than three decades, the ideas advanced in The General Theory dominated macroeconomic policymaking in the United States and other industrial countries.
The General Theory is a complex book, and considerable controversy exists about how to interpret it. Several key points, however, come through clearly: (1) no natural tendency exists for the economy to return to full employment after a recession; investment demand might be insufficient to soak up all the savings that people wish to accomplish
John Maynard Keynes (1883-1946), architect of the theory that full employment could be maintained by appropriate changes in government spending and taxation and through control ofprivate investment. His theories gained increasing acceptance during the 1940s, 1950s, and 1960s.
At fUll employment income; (2) monetary policy is unlikely to be effective in restoring investment and full employment when the economy is below full employment; and (3) to restore full employment after a recession, it may be necessary to control private investment and supplement it with government spending on public works. The last point—stressed by Keynes’s American disciples such as Alvin Hansen, Abba Lerner, and Paul Samuelson—was taken to mean that the economy could be kept on even keel by increasing government spending, or cutting taxes, during recessions and by reversing these actions when, after reaching full employment, inflation threatened.
The success of deficit spending in eliminating unemployment during World War II seemed to confirm the value of the Keynesian medicine for treating severe depressions.
This mood of optimism was strengthened by the handling of the first postwar recession, which lasted (as shown in Table 28.1) from November 1948 to October 1949. After industrial production dropped 10 percent and the gross domestic product (GDP) fell 4 percent, the Truman administration moved quickly to award military contracts in “distressed areas,” and although unemployment rose above 5 percent for several months, revival came so quickly that public clamor for action never became loud. The Keynesian medicine seemed to work on mild recessions and without creating dangerous side effects requiring other treatments (see Economic Insight 28.1).
World History
