“It is markets which are now paying the piper and the adjustment will be sudden and at least as grim as the soviet collapse.”
We have lived with macroeconomics for so long that we know of no other system. It was designed by Keynes purposefully to give governments justification for economic intervention, whether it be industrial or by monetary manipulation. The reason was a misdiagnosis, the apparent death of classical economics which was wrongly blamed for the Great Depression. That was actually due to the newly established Fed pumping up a credit bubble which ended spectacularly with the Wall Street crash of 1929.
President Hoover followed by President Roosevelt pursued a policy of intervention which simply prolonged and worsened the slump. It contrasted with previous slumps, notably that of 1920—1921 when President Woodrow Wilson refused to intervene, following the policies of previous presidents. He let the economy sort itself out, which it rapidly did as economists of the day understood and predicted.
In the 1930s, Keynes thought long and hard about why it was that America and much of the world was driven into depression, dragging the rest of the world down with it. Prices were collapsing, banks were going bust, and unemployment had soared. The problem for employers was that output prices were falling more rapidly than their costs. And they could only stay in business if workers suffered substantial cuts in their wages. Keynes’s socialist leanings rejected this market solution in favour of seeking a better system, one in which governments intervened to prevent such a catastrophe from happening again.
The problem was that he had to demolish the central tenet of capitalism, which is the
