Neoclassical Economics isn't working!

In class this week we focused on why neoclassical economics wasn’t working. It is an economic system based on exchanges. People exchange labor for wages then that money is exchanged to buy commodities. It also preached the individuals wants to maximizing profits. The idea of individualism asks many questions. Individual liberty creates the betterment for individuals but is it better everyone? When people make choices that help them become wealthy does it help the betterment of others?  For neoclassical economics to work everyone involved would need to be a rational economic actor. As Dr. Gannon asked us in class most of the time people don’t know what to do with their money. It is because we cannot predict the future. If we could predict the future then we would all make the best economic choices and be well off financially. These theories are always good on paper but do not make sense in real life. When questions about the 2008 crisis were not able to be answered by neoclassical economist the tides seemed to be turning to a Paradigm shift.

John Maynard Keynes would be a capitalist with ideas that could remodel capitalism. He believed that age of the corporation was not good for the economy. The wealthy could only make money while the middle and bottom classes stayed idle or suffered. He believed that when needed the state should be able to intervene and jump start the economy when it becomes idle. To him it is the government’s duty to make sure an economic crisis does not happen. Spending money was the way to get out of crises and if needed going into deficit was okay. The reason for a deficit being okay is because he believed ultimately it would boost the economy back up and the deficit would go away. He believed spending money trying to fix the problem was better than letting the invisible hand do its job, because to him the invisible hand didn’t always exist. While many economic thinkers believed making profits was the most important thing to Keynes personal relationships were the most important. Ideas like these made many think he was a radical. He may or may not have been a radial but he was a revolutionary thinker.  He was such an honest intellectual that he did not care to change his mind when he found he was wrong. Neoclassical economists were stuck in there ways and that’s what made him different from the rest. He was a committed capitalist that wanted answers and knew the old way of explaining things was not working.

War in 1939 would change the economy for the United States. The decade long depression would soon be over (pg. 415). This was mainly due to the mass production of war materials all over the US. As Hunt and Lautzenheiser put it, “The American armed forces mobilized 14 million people who had to be armed, quartered, and fed. Between 1939 and 1944, the output of manufacturing, mining, and construction industries doubled, and productive capacity increased by 50 percent” (pg. 415). Before the war started 20 percent of the labor forced was unemployed, when war broke out the problem was almost instantly fixed. In actuality it was estimated the American economy was suffering from a shortage of labor. For Keynes’s this proved his theory that government intervention could boost the economy. Economists proclaimed, “Capitalism could be saved… by the wise use of the government’s power to tax, borrow, and spend money”. To society this restored the fact that capitalism could be saved and was the best economic system out there. Because of the success of the government saving the economy in 1946, congressed passed the Employment Act; it obligated the government to intervene to make sure employment was maintained. As we have seen there are still economic crises, and economists suggest they are less severe than the 1930 Great Depression, so the crises are now called recessions. Economics say Keynes ideas are a big part of the reason why these crises are no longer depressions and reduced to recessions.

Keynes ideas were seen as radical at one point in time, but he was all for capitalism. He just wanted capitalism to reach its full potential. Some of his ideas were true, such as the government intervention to fulfill employment would boost the economy, along with taking the risk of going into deficit to try and help the betterment of the whole. He helped remodel capitalism like he wanted to and deserves much credit for that.  It takes men like him to change things when the economy isn’t working. We see the government today always trying to help the country better its economy. Could you imagine if capitalists still believed the invisible hand regulated the economy?