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ECONOMY 1945 and EARLIER
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The Great Depression | The Industrial revolution (incl.| early modern times and Middle Ages) | Ancient times

 

  The Great Depression
The Great Depression bottomed out at the end of 1932, with British unemployment having reached 20%, American unemployment even higher. Keynes wrote 'The General Theory' in 1936 to explain why the recovery was so feeble. His revolutionary proposition was that following a big shock - usually a collapse in investment - there were no automatic recovery forces in a market economy. The economy would go on shrinking until it reached some sort of stability at a low level. Keynes called this position "under-employment equilibrium".

The reason was that the level of activity - output and employment - depended on the level of aggregate demand or spending power. If spending power shrank, output would shrink. In this situation it was the government's job to increase its own spending to offset the decline in public spending - that is by running a deficit to whatever extent necessary.
John Maynard Keynes would argue that the cuts implemented by the Coalition government will not aid the UK's economic recovery. Keynes's theory was forged in the Great Depression of 1929-1932 - the biggest economic collapse of modern times. As their economies contracted, governments responded to their mounting budget deficits by raising taxes and cutting spending.
To cut government spending was completely the wrong policy in a slump. When an economy is booming, a hair shirt at the Treasury is the right policy, when it is stagnating it is the wrong policy. Keynes's message was: you cannot cut your way out of a slump; you have to grow your way out. Eighty years on we have still not fully learnt the lesson. Three years after the collapse of 2008, our economy is flat: there are no signs of growth, nor can the Osborne policy of a thousand cuts produce any.

It was Friedrich Hayek (*), who represented the orthodox theories which Keynes attacked. According to Hayek the main cause of slumps was excessive credit creation by the banks leading to overspending. The boom was the illusion; the slump the reality. The situation following an injection of money by the banking system would be similar to that of a people on an isolated island, if, after having partially constructed an enormous machine… they found they had exhausted all their savings before the new machine could turn out its products. They would then have no choice but to abandon, temporarily, the work on the new process and to devote all their labour to producing their daily bread without any capital.

That is, go back to growing their own food - much as the Russians did when their economy collapsed in the early 1990s. Keynes was scathing in his comment on Hayek's book, Prices and Production, which he called "one of the most frightful muddles I have ever read". "It is an extraordinary example of how, starting with a mistake, a remorseless logician can end in Bedlam."
Hayek gave up serious economics, though not serious writing. He and Keynes developed a wary respect, and even liking, for each other. "We get on very well in private life", Keynes wrote. "But what rubbish his theory is." Keynes's magnetism made a deep impression on Hayek, but he never stopped believing that his influence on economics was "both miraculous and tragic".
Le mont Pèlerin

(*)

Hayek belonged to the Austrian economists, who not only defended the interests of the market, but more important to them was the culture that the market needed for functioning. The Viennese economists had to deal with turbulent social, political and economic developments: an emancipating working class in large numbers turned away from the liberal movements and total erosion of support for the free market during the interwar. This made the Austrian economists extra aware of the necessity of the cultural context of an economy. It was clear to the Austrians that the workers would not easiliy accept the political and economic system, fears fueled further by the rise of Marxism. Ideals of fairness, deliberation and common interests seem to have gone completely. On the left side there is an irrepressible belief in the making of the society. A new generation of scientific socialists wanted society rationalized and redesigned, strengthened by belief in scientific progress. Right seeks a strong leader and gives growing criticism on the liberal values ​​of moderation, reasonableness and civil liberty. Fueled by the ideas of Freud and Nietzsche, among others, civilization is increasingly seen as a burden that should be dropped. Hayek begins to use his Viennese experiences for a new theory about the market. His conclusion is that markets are cultural institutions that can only exist if they are supported by the majority of the population and when the outcome of market processes is accepted as a more or less fair. Markets, he argues, constitute a framework within which people can express themselves more able to handle, and achieve their goals. But to make this possible, these institutions should be well maintained and perceived by the people as legitimate. Markets, according to Hayek, can only function as people share certain standards, like language contributes to communication as vocabulary and grammar are shared. This means, in other words, that markets can only exist because of certain shared values ​​and norms. the social goods.

 

The industrial revolution  

The first economist in the meaning of the word was the Scotch Adam Smith (1723-1790). He defined the elements of a national economy: products are offered at a natural price generated by the use of competition - offer and demand - and the division of labour. The basic motive for free trade is the human self interest. The so called self interest hypothesis became the anthropological base for the economics.

Thomas Malthus (1766-1834) transferred the idea of offer and demand to the problem of surpopulation. The United States of America became the place where millions of expatriates from all European countries were searching for free economic evolvement. In Europe a wild capitalism started to replace the system of mercantilism (today: protectionism) and lead to economic growth. The period is called industrial revolution because the system of production and division of labour enabled the mass production of goods. The industrial revolution lessened the role of subsistence farming, converting it to more extensive and monocultural forms of agriculture. In the last three centuries, the economic growth took place mostly in mining, construction and manufacturing industries.

Early modern times

The European captures became branches of the European states, the so-called colonies. The rising nation-states Spain, Portugal, France, Great Britain and the Netherlands tried to control the trade through custom duties and taxes in order to protect their national economy. The so-called mercantilism was a first approach to intermediate between private wealth and public interest. The secularization in Europe allowed to use the immense property of the church for the development of towns. The influence of the nobles decreased. The first secretaries of state for economy started their work. Bankers like Amschel Mayer Rothschild (1773-1855) started to finance national projects as wars and infrastructure. Economy from that on meant national economy as a topic for the economic activities of the citizens of a state.

Middle ages

In mediaeval times the great conquerors raised venture capital to finance their captures. The capital should be refunded by the goods they would bring up in the New World. Merchants as Jakob Fugger (1459-1525) and Giovanni di Bicci_de' Medici (1360-1428) founded the first banks. The discoveries of Marco Polo (1254-1324), Christopher Columbus (1451-1506) Vasco da Gama (1469-1524) lead to a first World economy, meaning international trade between the continents. The first enterprises therefore were trading establishments. In 1513 the first stock exchange was founded in Antwerpen. Economy at the time meant firstly trade.
"the cruellest of our revenue laws, I will venture to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature for the support of their own absurd and oppresive monopolies. Like the laws of Draco, these laws ,may be said to be all written in blood". Adam Smith, Wealth of Nations

 

Ancient times  

The ancient economy was mainly based on subsistence farming. The exchange of goods happend within a barter economy. In the Ancient Greece, when the word economy came up, the majority of people were bondslaves of the freeholders. The economic discussion was driven by scarcity. Aristotle (384-322 B.C.) was the first to differ between a use value and an exchange value of goods. (Politics, Book I). The exchange ratio he defined was not only expression of the value of goods but of the relations between the people involved in trade. Economy became a synonym for trade, money and profit. For most of the time in history economy therefore stood in opposition to institutions with fixed exchange ratios as reign, state, religion, culture and tradition.