SS 30-1 Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.1

Keynesian Economics  As the 1930’s progressed the recession deepened and on one seemed to be able to do anything about it.  John Maynard Keynes, a British economist, studied the depression and developed a new economic theory.  He discovered a flaw in the market economy.  It said that employment would be full if supply and demand were in balance. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.2

Keynesian Economics continued …  He said that the Great Depression proved this wrong.  He said that the economy is unstable and at times of stress people hoard money and fail to invest in the economy thereby creating a recession.  Keynes wanted to avoid the destructive and unpredictable roller-coaster ride of the unregulated market.  His analysis showed that periods of inflation are followed by periods of recession. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.3

Keynesian Economics continued …  Because the prices of everything rises too high during the inflation cycle, companies shut down and workers lose their purchasing power.  This slowdown then affects other companies who also cut back and then the economy starts to spiral out of control.  Keynes believed he had a simple solution to this problem.  The market is driven by the concept of supply and demand. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.4

Keynesian Economics continued …  When goods are plentiful, prices come down and when goods are scarce, prices go up.  This belief holds for labour and all other components of the market including interest rates.  Classical liberals argued that if this was true then it was like a natural law and everyone should take personal responsibility and save for when times will be bad. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.5

Keynesian Economics continued …  Keynes countered by saying that since few individuals could predict the market most ordinary people would suffer if things went bad.  Because the market is controlled by market demand then Keynes believed that to make things even one had to control and regulate consumer demand.  He said that during inflationary times governments should raise interest rates, raise taxes and reduce government spending on capital projects.  These actions would drain surplus money from the economy and inflation would cool down. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.6

Keynesian Economics continued …  As the economy cooled down the government could decrease interest rates, decrease taxes and increase government spending, even if it meant going into a temporary deficit.  Deficit spending was a radical new theory at this time.  These actions would pump money back into the economy and it would grow again.  Any deficit that the government had would be eliminated during the next inflationary period. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.7

Keynesian Economics continued …  The government would regulate demand by manipulating the supply of money available to producers and consumers.  This cycle control would lessen the highs and lows of the previous system but leave the free-market system largely intact.  These ideas became known as demand-side economics. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.8

Keynesian Economics continued …  Franklin D. Roosevelt, U.S. president from 1933 to1945 was the first convert to Keynes’s theories.  He implemented large public works programs during the 1930’s and this became known as the New Deal.  This was an echo of the “square-deal”.  The New Deal also provided emergency relief, reformed the banks and tried to invigorate agriculture and the economy. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.9

Keynesian Economics continued …  This was a major shift towards the welfare state and mixed-economies.  Free market principles became mixed with some government involvement in the economy.  This was the start of modern liberalism and it became entrenched in Canada and many western nations following World War II. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.10

Marxism  Marx rejected the ideas of Rousseau and others as not being scientific enough.  Marxism is a radical form of socialism, often called scientific socialism or communism to distinguish it from other socialist ideologies. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.11

Marxism and History  Marx believed that history is a story of class warfare.  The only way to overthrow capitalism was to have a class struggle between the proletariat (worker) and the bourgeoisie (owners).  A worker’s revolution was necessary before any significant changes could be made to society. Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.12

Communist Manifesto-1848  -Karl Marx and Friedrich Engels wrote the Communist Manifesto to elaborate on the principles of scientific socialism.  The Proletariat would gain the means of production by:  Abolition of private property  Heavy progressive or graduated income tax  Confiscation of property of emigrants and rebels Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.13

Communist Manifesto-1848 continued…  Abolish rights of inheritance  Centralization of credit and banking with a state bank and exclusive monopoly  Centralization of the means of communication and transport  Extension of factories and instruments of production owned by the state  Equal obligation of all to work Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.14

Communist Manifesto-1848 continued…  Combination of agriculture with manufacturing industries-equal distribution of population all through the country  Free education and abolition of child labour-Combine education with industrial production  Countries that implemented Marxist ideas and communism focused their economies on the abolition of private property and the centralization of the means of production in the hands of the state Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.15

Communist Manifesto-1848 continued…  Created the command economy where government planners decide the issues of supply and demand.  Revisit history of communism on pages Program of Studies: 2.8-Analyze the evolution of modern liberalism as a response to classical liberalism.16