HY 357 Lecture Notes - Lecture 62: Money Supply, Works Progress Administration, Civilian Conservation Corps
6 Jun 2018
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Theories of Economic Policy
In developing an economic policy, government officials rely on the recommendations of
economists who typically base their analyses on theories of how the economy works or should
work. As might be expected, economists often disagree on the cause of a stock market decline or
the best solution for curbing inflation.
Laissez-faire economics
The first, and for a long time the only, widely accepted economic theory was the laissez-
faire theory proposed by Adam Smith in his Wealth of Nations(1776). Laissez-
faire roughly translates as "to leave alone," and it means that government should not
interfere in the economy. This theory favors low taxes and free trade, and it strongly
holds that the market is self-adjusting — whatever happens will be corrected over time
without the help of the government.
Keynesian economic theory
John Maynard Keynes, an English economist, published his General Theory of
Employment, Interest, and Money (1936) during the Depression. He argued that
government should manipulate the economy to reverse the periodic downturns that take
place in the market.
Keynes maintained that economic depression was due to a lack of consumer demand.
This created excess inventories of goods that forced business to cut production and lay
off workers, which led to fewer consumers and even lower demand. The solution was to
increase demand by increasing government spending and cutting taxes. This fiscal
policy, as it became known, left people with more money after taxes and basic
obligations to use for goods and services. Factories increased production to meet the
demand and hired more workers.
Franklin Roosevelt used many of Keynes's ideas in the New Deal. The federal
government became the "employer of last resort" through such programs as the Civilian
Conservation Corps (CCC) and the Works Progress Administration (WPA). These
programs did not bring the country out of the Depression, however. The end to the
Depression is more attributable to increased defense spending as World War II
approached.
Monetarism
In the late 1970s and early 1980s, Keynesian economics fell into disrepute because it
did not offer a solution for dealing with unemployment and inflation at the same time.
Some economists argued that the Keynesian theory invited excessive government
intervention. To monetarists, inflation, unemployment, and stagnation were caused by
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