This is an article about depression, not the ‘depression’ of mental state, but the ‘depression’ of the economy. I am aware that it seems like a click-betty title (which it is), but the content is worthy of it. This is an article about an undergrad university student who saved the world from collapsing and so many things that we can learn from it. Even if you are not all that interested in Economics, trust me, it is going to be very interesting, so much so that after listening to this story I am considering a double degree in CS and Economics.
The story begins on September 4, 1929, in the USA when a major fall in stock prices began. The same pattern followed throughout almost all the countries of the world. During the depression, people didn’t really have much money, so the demand for goods and services in the market was reducing as people couldn’t afford them.
The father of Economics, Adam Smith, had claimed that when there is a fall in the prices of commodities, then the demand for the commodity rises. And that the same was true for the opposite, i.e. when there was a rise in the price, the demand falls. That is what everyone in business thought and knew of. So, not surprisingly, the suppliers in the market thought, “Right now people are not purchasing the goods because the prices are high. If we follow the law of demand and reduce the prices of the commodities, demand will increase and people will start buying our commodities.” They were right until they weren’t.
Initially, after the prices of commodities were dropped by the suppliers, people started buying goods and the demand increased, but it didn’t last for long. After some time, people realized that if they didn’t buy for longer, the price would drop even more. So most people stopped buying commodities that weren’t fundamental needs. This caused a disruption in the market. Even though the supplier reduced the price, the demand wasn’t increasing. This led to many industries shut, which further led to the shutting of other related factories.
Since the industries were shutting down, people were losing their jobs, which caused serious unemployment. And since they didn’t have a job, they didn’t have any money with which they could afford the commodities offered by the suppliers, and the demand in the market remained low. The same was the case in almost all the countries of the world.
This economic depression lasted until 1939. But how did the world economy recover from this depression? That’s the question I asked my teacher as well when he was telling us about it. And this is where J. M. Keynes comes in.
During the Great Depression, Keynes was a university student. He was an excellent student, but it was becoming difficult for him to pay his tuition fees due to the depression. So he decided to apply for a government job by taking the Civil Service Commission exam of the UK. When the result of the exam was published, Keynes had failed the exam.
That was shocking for both Keynes and his friends as Keynes was a scholar of Economics, and he had got the lowest marks in Economics itself. By the suggestions of his friends, Keynes filed a request for rechecking of his paper. The news got out and everyone started questioning the professors and scholars who had checked his paper. The professors claimed that Keynes had discarded all the theories of the classical and the neo-classical eras of Economics, and had suggested his own solutions to the ongoing problem of the Great Depression which the professors couldn’t comprehend. For that very reason, they failed him.
The matter didn’t extend much, but then, in 1936, he included these ideas in his book The General Theory of Employment, Interest, and Money. He had suggested that the situation was not in control of the supplier and consumer now. He claimed that the governments needed to interfere, and solve the problem. They could do so by creating employment in the market. It could also be done by the dig and undig method (making people dig a road, then making them fill/undig it).
This would require people which would create employment, machinery, and tools to dig which would increase the demand for steel and iron, and it would require cement and other materials which would increase demand in their respective sectors. By the late 1930s, leading Western economies had begun adopting Keynes’s policy recommendations. Soon all other countries followed. This increased development, created employment, which led to the increase in demand, which ultimately restored the economies of the world.
This story has a lot of takeaways, one of them being that even if your ideas are discarded by some people, namely “scholars”, doesn’t mean that what you think is entirely wrong. With time and effort, could be through building an audience online, you can find the people who agree with you which could ultimately lead to greater things. This story isn’t very detailed, because if I did so, it would reach at least a dozen pages.
I appreciate it if you read it till here, and I would love it if you dropped a comment down below with your thoughts. Also, if you find what I write interesting, please do share this newsletter with your friends and family. This way they can get a weekly story of inspiration, effort, and we could all figure things out, together.