March 23, 2008 • 1 min
During the economic depression that affected the whole Western world in the 1930s, with its mass unemployment, poverty and other social ills, governments, for the most part, did nothing. The accepted wisdom was that, given time, the free market would solve its own problems and that government interference would only make things worse. John Maynard Keynes, the British economist who challenged this belief, argued that it was the proper responsibility of governments to prevent both booms and recessions in order to maintain gradual economic growth and permanent full employment. He maintained that this could be done by manipulating taxation, credit and public expenditure. If the economy was growing too fast, then money and, therefore, demand could be taken out of the economy by higher taxes, lower government spending and by making it harder to borrow money. If there was recession and growing unemployment, then the government could put money into the economy through lower taxes, higher public expenditure and easier credit. Thus, demand could be encouraged. If, as a result, there was money in people’s pockets, then more would be spent on goods and more people would be needed to make the goods to fulfil the extra demand, and this would reduce unemployment.