1929 full employment. Accordingly, states should never

1929 economic crisis, which isgenerally called as Great Depression, had upset the balance of world economicorder. Until the depression, classical liberal economic                                  theories weredominating World order. Classical economics is a supply oriented theory,claiming that whatever the level of supply, it is going to create its owndemand in the market. If the free market determines the levels of prices,economy will always be in the situation of full employment. Accordingly, statesshould never interfere in the market. Prices are flexible, which provides thefull employment balance.

Increasing wages will lead demand for labor to fall, the fallingdemands will cause wages to decrease again and it will cause increasing demandfor labor and employment automatically. Selfish behaviors of the actors in themarket will provide benefit to all people in the market.1Classical theory had firstly facedwith a crisis that stated in 1870’s then it managed to survive by transformingto neoclassical theory. In this way, it maintained its domination on the globaleconomic conjuncture until 1929 Great Depression.

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The crisis refuted a lot ofthesis of Classical Liberalism. Non-interference of states was creating so muchinequality. Banks were structured weakly, their capital and credit principleswere unclear. In USA where the depression broke out, banks could not recoverthe credits they had lent. As a result of these conditions a lot of banks wentbankrupt, so many people become unemployed. Fail of classical liberals forcedstates to get involved in ending Great Depression.

2        In all these circumstances, neweconomical approach of John Maynard Keynes appeared on the world stage with hisbook The General Theory of Employment, Interest and Money. His suggestions forworld economic order is named as Keynesianism. Theory of Keynes mostly containsshort-run measures in order to overcome the crisis. Future vision of Keynes wasso similar to classical theory. But he generated a theory that concentrates onsolving issues of its period. He called himself a liberal democrat.

He wasopposed to Soviet Regime that was affected from Great Depression least. We canalso accept that Keynes offered his theory related with his fear that thepeople can shift to Nazism and Fascism during these drastic depression period.3   KeynesianismIn contrast to Classical Theory,Keynesianism is a demand-side economic theory. His observation on Great Depressionarose from the lack of ability to boost the aggregate demand. During the crisisperiod, economy could not achieve full employment balance, the supply could notcreate its own demand. At this point the main argument of Keynesian theory oneconomic crises is that economical shrinkages are generally arisen from thehuge drops in the demand. Aggregate demand refers to sum of all consumptions,investments and public expenditures.4 In his opinion, state shouldincrease the aggregate demand by applying some fiscal and monetary policies.

Decline in demand will naturally reduce the flow of resources to service andproduction of goods, which may damage employment and increase inflation.Natural changes in the prices, wages and interest rates cannot solve theproblems in the short run, then the harms which is occurred in the short runcan give a rise to bigger devastation in the long run. Keynes clarified hispessimism for the future with these sentence ”In the long run, we are alldead”5 According to Keynes, the reasons ofrecession and unemployment are occasionally the measures that people take toavoid them. If households want to save more than firms’ investment desires,output and employment levels in the economy will decrease. Increasing savingsor declining spending can lead to unemployment. Nowadays we witness the samecircle since 2008 global crisis. Each crisis forced states to apply monetaryand fiscal policies as Keynes argued for state intervention.

States managetheir monetary policies through central banks.6 Another factor that Keynes differsfrom classical liberals that his thesis on price flexibility. Keynes claimsthat prices and wages are sticky in the short-run. That means have resistanceto change, to scale up and down in accordance with the conditions of themarket.

They can only become flexible in the long-run.7 An example can prove that assertionof Keynes is right. For instance, a company’s incomes and costs can fluctuate dayby day. Although the fluctuation always exists, the companies do not change theprice of the products they sell or the wages of their employees.

The wages areadjusted annually in general, prices are not changed day by day. They aregenerally adjusted once or a few times in a year. As the basic theory ofeconomy is that there are inverse proportion between money supply and interestrates in the short run. Keynes suggests that states should manipulate the interestrates and exchange rates in the short run for promoting economic growth andbeware of crises.

Central banks make effort todetermine the interest rates with open market operations, credit operations orregulating required reserve ratio. Central banks influence exchange rates bycontrolling money supply. Exchange rates are determined in the free market,central banks can supply or accumulate liquidity to manipulate exchange andinterest rates.8  Welfare State Actually, Keynesianism and welfarestate notion can be identified with each other. Because welfare state conceptcame into prominence with Great Depression, just like emergence of Keynesianism.Welfare state can be defined as the concept of government policies that considerssome specific services like sheltering, health, education etc. as basic rightsof their citizens and provide these services without requiring any payments andwithout any discrimination. Welfare state stands between free market capitalismand socialism.

One reason that welfarism was implemented is the concerns inliberal states to experience a shift to communist Soviet ideology in theirpopulation. Today welfare state regime is most successfully applied inScandinavian countries (Sweden, Norway) and some other states like Germany,Canada.9 Keynes supported state participationin the economy to increase the prosperity of the people. He claimed thatstate’s assistance to the private sector causes recoveries in all components ofcountry. He explained this with ”multiplier effect”.

According to Keynes, ifstate supports companies by decreasing taxes, protecting domestic area withcustom tariffs, this will create good results for labor, customers and otheractors in economy.10 Bretton Woods SystemThe reason that Keynesianism has been still sopopular is Keynes is one of the founders of Bretton Woods, internationalmonetary system. In 1944, some international organizations such as IMF-InternationalMoney Fund and World Bank was founded. Counterparty states agreed on commonmonetary order, they accordingly indexed their currencies to US Dollar whichwas indexed to gold. This agreement disbanded in 1971 due to devaluation ofDollar, but the institutions (IMF, World Bank) still exist and effective on Worldeconomy.11   


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