New Keynesian Economics/Post Keynesian Alternatives

By Roy J. Rotheim | Go to book overview

2

KEYNES AND THE NEW KEYNESIANS ON MARKET COMPETITION

J. A. Kregel

Although many economists were quick to adopt Keynes’s policy conclusions concerning the best way to emerge from the 1930s’ Depression, there was widespread resistance to the implications of the underlying theory. One of the basic reasons for the relative success of Keynes’s policy proposals for public works spending was that they had already been repeatedly recommended by economists from a wide range of backgrounds during the 1920s and 1930s. Even Herbert Hoover, while Secretary of Commerce during the 1920s, had taken action to formulate specific public expenditure packages which could be introduced in the event of cyclical downswings. He was later to implement these policies as President of the United States in the period after the 1929 stock market crash.

Most economists believed that the events of the 1930s were due to impediments to the self-adjusting competitive price mechanism. There was division amongst economists as to whether these impediments simply acted to slow the process of adjustment to equilibrium or whether they were structural imperfections which had been slowly building since the turn of the century. In either case, the economic situation was sufficiently serious, and the downturn had proved sufficiently durable, to recommend emergency action to attempt to jump-start the autonomous adjustment process. Thus, public works expenditures were looked upon as pump priming devices which would restore the operation of the perfectly competitive, automatically adjusting price mechanism. The structural imperfections, such as might occur when monopoly becomes extensive in product markets, could be eliminated by means of anti-trust legislation and reducing the power of trade unions to fix wages at excessively high levels.

An important corollary to this view was Irving Fisher’s idea that under certain specific conditions the automatic adjustment mechanism of the competitive price system might operate perversely. Just as an economy which operates by allowing economic agents to become indebted on the basis of future expected incomes could experience a self-reinforcing inflationary boom due to excessive money or credit creation, it might also experience a self-reinforcing deflationary slump due to the destruction of money and credit. Falling prices mean that debts cannot be

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