F ROM C APITALISM TO M IXED E CONOMICS The Effects of the Great Depression Reading: Ideology: ( )

W ELFARE C APITALISM Generally refers to a classical liberal economic system combined with a government that uses legislation to give workers protections such as limited working hours and a minimum wage, and a safety net with features like pensions and medical insurance. Further develops out of great depression—we see the establishment of welfare states

Classical liberals gradually came to see the merits of some of their opponents’ views and modified the expression of some of their values and beliefs Rather grudgingly, classical liberals began to recognize that some modifications were necessary. The basic premise for these modifications was an acceptance of the fact that those who believed in the pursuit of industrial efficiency—laissez-faire capitalists--needed to develop a social conscience and more concern for the equality rights of workers Welfare Capitalism: a classical liberal economic system combined with a government that used legislation to give workers protection. Examples: limited working hours, minimum wage, pensions and medical insurance.

Britain, for example, passed a series of Factory Acts, beginning in 1810 Each Act gradually improved the working conditions in factories, decreased working hours, regulated the ages at which children could be employed, and regulated the number of hours women and children could be required to work Germany passed similar acts starting in 1883 Still, capitalists did not gladly or easily give way to new ways of thinking about society’s responsibilities

He was a reformer who recognized some of the problems associated with classical liberalism When the United Mine Workers of Pennsylvania walked off the job, instead of calling in the army against the workers as owners had hoped, Roosevelt threatened to use the army against the owners should they refuse to negotiate. He called this a “square deal” and eventually forced the arbitration. In 1912, T. Roosevelt went on to form the National Progressive Party because he felt the Democrats and Republicans were too resistant to change. Look at the National Progressive Party’s platform (pgs ) What three principles did the party hope to implement that challenged classical liberalism?

The move from welfare capitalism to the welfare state was motivated by the Great Depression. The problems that arose during this period made it obvious that the existing political, economic and social order had failed. What began to emerge was as we know it today.

T HE E ND OF L AISSEZ -F AIRE iv.In 1932, there was an election in the US. v.Franklin Delano Roosevelt (FDR) had a “New Deal” for the American people. He proposed to help people through the Depression by bringing in Social AssistancePrograms.

II.K EYNESIAN E CONOMICS i.John Maynard Keynes provided the clearest explanation of what caused the business cycle and the GD. a.Keynes’ theories were the ideas behind Roosevelt’s New Deal ii.Keynes wrote the book General Theory on Employment, Interest and Money

John Maynard Keynes

K EYNESIAN E CONOMICS iii.Keynes knew capitalist economics, if let alone, wouldswing back and forth from prosperity to depression iv.He wanted to replace very, very, very bad times with just bad times. Hence very, very, very good times with just good times. v.All problems have to do with the supply of money

K EYNESIAN E CONOMICS vi.Keynes developed Circular Flow of Money to explain workings of business cycle. Review from previous class. 1.Injections: Increases size of $ flow a.Investment (I) b.Govt. Expenditure (G) 2.Leakage: reduces size of $ flow a.Savings (S) b.Taxation (T)

B ASIC E CONOMIC D EFINITIONS : Fiscal Policy: a set of measures concerned with the overall effects of government spending and taxation on the economy. Monetary Policy: a set of measures used to control the supply of money and credit in the economy.

K EYNESIAN E CONOMICS vii. Two Main Problems Keynes wanted to fix: Problem During Prosperity: Supply of money TOO HIGH!! This causes the value of money to decrease. Causes: !!INFLATION!!- FIRST PROBLEM

K EYNESIAN E CONOMICS 2.Problem During Depression: Supply of money TOO LOW!! Results in unemployment and starvation. Causes: !!DEPRESSION!!- SECOND PROBLEM

K EYNESIAN E CONOMICS viii.Solutions Drawing of business cycle 1.Inflation: Supply of $ too high a.Taxation (Fiscal Policy): takes money out of the hands of the people b.Raises Interest Rates (Monetary Policy): No one will want to borrow from banks

K EYNESIAN E CONOMICS 2.Depression: Supply of $ too low a.Lower Taxation (Fiscal Policy)- Money must go back into system. People have more money in their own pockets which they then spend b.Lower Interest Rates (Monetary Policy)- People borrow from banks and spend Usually big ticket items, houses, cars, etc. sRP311c

L AISSEZ -F AIRE TO I NTERVENTIONISM iv.FDR promised the people a New Deal. v.Specifically, his gov’t would intervene in the economy through spending and taxation (G and T) vi.FDR promised, if elected, he would create a social security net- unemployment insurance, minimum wage, welfare.

L AISSEZ -F AIRE TO I NTERVENTIONISM vii. FDR knew no one had a demand for products (not spending) due to the fact they weren’t working viii.Why FDR’s New Deal worked: a.Basically he gave large portions of population money b.Priming the Pump- if people had money they would spend and demand for goods and services would increase c.Demand for these would cause factories to hire d.therefore, more people had more money to spend

L AISSEZ -F AIRE TO I NTERVENTIONISM ix.FDR’s New Deal a tremendous success

L AISSEZ -F AIRE TO I NTERVENTIONISM x.FDR and Keynesian Economics continue to be used today by all mixed economic systems xi.THIS MEANS capitalism came to an end during the 1930s when FDR introduced his New Deal.

L AISSEZ -F AIRE TO I NTERVENTIONISM Terms FDR New Deal Depression Inflation Business Cycle Keynesian Economics Priming the Pump Social Security Net