Ludwig Van Mises thought markets like people needed to be free from government meddling. Van Mises predicted that the new soviet socialistic economy would never work, precisely because the government controlled wages and prices. What Van Mises said is that the great flaw of socialism is that is doesn’t have a functioning price system to send all the signals to consumers and producers as to what something is worth. That these prices are the very heart of what makes a functioning economy work.
Moscow, 1992, in Soviet Russia, it seemed as if Van Mises predictions were coming true. There was an economic disaster. Lennie abolished what he saw as chaos of free markets. The state controlled everything. Wages and prices were fixed. Lenin knew he needed a different kind of policy. His institution became known as ‘The New Economic Power System’. Lenin said farmers can sell their own goods, and own their own land. He said that small businesses can operate and they started to get an economic revival. After the death of Lenin, Stalin introduced ‘central planning’. Under him the communist party planned and managed every aspect of the economy.
While communism seemed to be forging ahead, capitalism looked to be doomed. In 1923, Germany and Austria were living with the economic consequences of the peace after the war. Forced to pay unbearable war reparations the defeated government simply printed more money. The result was inflation. More inflation. Hyperinflation. Hyperinflation wiped out the savings of the middle class, due the government intervening in the economy.
The 1920s, was a boom time for American cities. Americans were buying stock. The stock market, the New York Stock Exchange, became a National Past-time. It was a classic stock market bubble. Then on Black Thursday, October 24th 1929, the bubble burst. Prices plunged. The downward spiral proved unstoppable. There was no longer any ability to earn, repay, consume, and produce. And with it went the banks (financial sector). People went to withdraw their hard earned savings. The millions that could not lost everything. About half the banks in the US closed after 1929. The government failed to halt the downwards spiral. In fact it made things worse, as a result of large unemployment. John Maynard Keynes, a British economist, argued that the government had to do something to fight depression.
Keynes set out to save capitalism from itself by writing a book about what caused the Great Depression and what to do about it. He aimed to rewrite the rules of economics, to see a country's economy as a whole, as a machine that could be managed. Democracy seemed to be losing ground, and with democracy, the system of liberty and emergence of totalitarianism.
In America introduced a program called New Deal in which he gave Americans help that they needed in bad times. He embarked on a program of reform. In essence, it was the beginning of fiscal policy. It was the first time that the government took an active role in attempting to secure American individuals from unseen drastic changes in the market.
For Roosevelt and the New Deal, they were at war with the Great Depression, and they responded with frenetic activity, relief programs for the unemployed, for the hungry; programs to get people back to work. They instituted a program of regulating capitalism in order to protect people from what they saw as the recklessness of the unfettered market. Privately, Roosevelt feared the market system had failed, so he created an entire alphabet of new agencies to regulate banks, the stock market, capitalism itself.
In conclusion, in the battle of ideas, the pendulum had swung from government to market, from Keynes to Hayek. Today Keynes’ theory is widely accepted and modern countries combine capitalism with some kind of government control. Most people feel that free market economy should remain but the government should still be around to see that economic rules are kept, and solve issues such as unemployment and inflation.
by
abuelgasim (student)
