Fishers Views On The Great Depression

The following essay will critically look at Fishers views on the great depression and then see how the depression is relevant to the recent financial crisis in 2008. It will look at what lessons should have been learnt and how the depression was escaped and as the symptoms and problems are similar, maybe similar policy responses are required. The first part of the essay will focus on the above mentioned, following on from this we will look at what measures current governments are using to recover from the crisis and critically evaluate how successful they have been. From this alternative suggestions will be looked at to see if they follow economic theory better, further on alternative viable options will be looked at. Fishers work in the Fisher

It was a role reversal from the depression where Keynes dominated economic and policy thinking and Fisher was largely brushed aside; is/was this the correct approach for the recession will be discussed further. Maybe Fishers work is still not as helpful as perceived and Keynes still has the answers to getting out of the economic downturn as much of the problems are the same; sluggish economy and ineffective monetary responses from authorities (Edwards, 2011).The justification for higher then inflation rate interest rates is because of Fishers work which became prevalent in the years after world war 2. It may have been a contributor for the inflation in the 1970s as his work misinterpreted was basically saying: if prices rise at 2 per cent yearly then a nominal interest rate of 4 is actually equivalent to a real rate of 2. As Johnson (1971) states, this makes it seem as inflation causes these interest rates to be justified, but in reality the interest rate is causing the inflation. Decades of this monetarist way of thinking: Friedman (1968) even states that the Fisher effect was the inspiration behind the augmented Phillips curve and has cemented its policy relevance. It was considered to be true in both the short run and long run; whilst money illusions were ignored in the model; considering this is one of the axioms of economic theory (Erber,

As mentioned earlier, Keynes policy measures ensured the economy got out of the great depression. Fundamental Keynesian economics states that ‘in the long run we are all dead’, so George Osborne clearly is not using economic rationale to base his 7/8th successive budget on. What the economy needs once again is a kick start. This already occurred in 1997 Japan, where the IVA tax was introduced to reduce public deficit, this resulted in a double dip recession which had the opposite of the desired effect (reduce public debt) and actually it increased for the next ten years (Boyer, 2012). Keynes (1936) recognised that employment is dependent on the level of effective demand and therefore it is influenced by investment decisions, the argument Benassy (1982) says is: when full employment does not happen and the unemployment is classical (because of the excess of real wages over marginal productivity). Current policy makers seem to have forgotten this, as previously during the depression, Keynes measures escaped the long depression due to a non-responsive business cycle, via large scale investments in infrastructure. Expansionary monetary only has a transitory impact on real economic activity under the rational expectations hypothesis. Austerity in the budget does not achieve its intended aim; as private agents anticipate future austerity policies such as budget cuts and tax increases thus they