In 1929, with the collapse of stock markets in America, a day called Black Thursday occurred in the world. The crisis spread to the whole world in a short time. Unemployment rates increased and the demand decreased all over the world. As a result, the market became quite stagnant, and deflation occurred. Keynes wrote The General Theory of Employment, Interest and Money during this period. He argued during this stagnant economic period, state intervention was crucial to stimulating the economy. Namely, despite the views of classic liberalists, he advocated state intervention in the market, so he was against laissez-faire. For instance, during the Great Depression, the state should make moves to increase the decreasing demand and reduce unemployment rates. The market revived with the New Deal policies implemented by the state in the USA after 1929. Thus, unemployment has decreased, and demand increased, so the opinions of Keynes prove.
In addition, Keynes claimed that long-term investments can also be a problem. According to him, the future is quite uncertain. This is why long-term investments should be well coordinated. Once again, the government can play a role in planning these investments. Moreover, he said cooperations are extremely important, so investments should be socialized. State and private companies should work together on investment. For example, cooperations should be regulated by the state, but are governed by the private sector.
Another claim is people act irrationally in times of crisis. During crises, people act by looking at the people around them. For example, if the people around them don't spend money, they don't spend it either. This situation is known as animal spirit. Also, people can act irrationally because of their emotions such as love of money and fear of losing. In these situations, some people always keep money in their hands. People in this situation are known as liquid lovers. In addition, according to him, the environment of trust in the market is integral. The government should take action to ensure confidence. When the market is unretained, the government can lower the interest rates, but the investments will not increase. Finally, Keynes opposes evolution in classical liberalism. He worried about disadvantaged people in the market, so the market should not be in disequilibrium. Namely, the liberalist market economy is criticized densely by him.
The fascist movements gained strength in the 1930s attracted the attention of many economists. One of them was Karl Polanyi. He claimed if the economic crises were not resolved, totalitarian regimes will appear. According to him, crises can always occur due to some factors. In particular, three fictitious commodity causes these crises. Firstly, he said it was wrong for labor to be commodified. Labor is a vital situation and people have to work for a living, but because of classical liberalism, it has turned into a wage-earning job.
Secondly, classical liberals commodify land. The land is a non-human-made item, but the liberals rented it for money. Thirdly, he is against money being a commodity. Money is the purchasing power, but now money has value because of the interest rates. Thus, these three factors are the cornerstones of the market economy. He also opposes the classical liberals' thesis that the market is formed naturally, citing these three fictitious commodities as examples.
Additionally, the market is not natural. In the 1600s mercantilist economic policies were dominant. States were heavily intervening in the market. Then the market economy emerged. According to liberals, government intervention in the market economy was heavily limited and this market occurred evolutionarily. However, Polanyi said the market economy emerged with the intervention of the state in the market. In other words, he claimed the market was not in a natural way due to these reasons, but the market relations always existed. Furthermore, he claimed the market was embedded with cultural and social institutions. Hence, the economic changes in the 18th century are related to social and political changes. He also claimed that the Society had a rather complex structure.
He also says that sovereignty and freedom are important in complex societies. The uniform economic system may pose a threat to the countries’ sovereignty. Also, individual freedoms are significant. However, Polanyi said the purpose of a market economy is to bring profit and prosperity, so the market economy does not care about individual freedom completely. They only care about freedom related to economic issues. Therefore, individual freedom should be preserved by states through regulations.
Keynes and Polanyi share similar views on some issues. Unlike classical liberalists, they both advocated state intervention in the market. They also claim the market did not appear evolutionarily and naturally. However, they had different opinions on other issues. Keynes thought the reason for the economic crises was the limited intervention of the state in the market and the poor planning of long-term investments. Polanyi, on the other hand, thought that it is due to three fictitious commodities. In addition, Keynes considers the intervention of the state to be rather critical, while Polanyi developed more market-related theses. For example, he claimed the market is embedded with political and social institutions. Thus, they think quite alike on some issues, but not on others.
Polanyi, Karl. 1945. Origins of Our Time: The Great Transformation. London: V. Gollancz
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