Classical And Classical Economics: The 1929 Economic Crisis

1929 economic crisis, which is generally called as Great Depression, had upset the balance of world economic order. Until the depression, classical liberal economic theories were dominating World order. Classical economics is a supply oriented theory, claiming that whatever the level of supply, it is going to create its own demand in the market. If the free market determines the levels of prices, economy will always be in the situation of full employment. Accordingly, states should never interfere in the market. Prices are flexible, which provides the full employment balance. Increasing wages will lead demand for labor to fall, the falling demands will cause wages to decrease again and it will cause increasing

His observation on Great Depression arose from the lack of ability to boost the aggregate demand. During the crisis period, economy could not achieve full employment balance, the supply could not create its own demand. At this point the main argument of Keynesian theory on economic crises is that economical shrinkages are generally arisen from the huge drops in the demand. Aggregate demand refers to sum of all consumptions, investments and public expenditures. In his opinion, state should increase the aggregate demand by applying some fiscal and monetary policies. Decline in demand will naturally reduce the flow of resources to service and production of goods, which may damage employment and increase inflation. Natural changes in the prices, wages and interest rates cannot solve the problems in the short run, then the harms which is occurred in the short run can give a rise to bigger devastation in the long run. Keynes clarified his pessimism for the future with these sentence ‘’In the long run, we are all dead’’

According to Keynes, the reasons of recession and unemployment are occasionally the measures that people take to avoid them. If households want to save more than firms ' investment desires, output and employment levels in the economy will decrease. Increasing savings or declining spending can lead to unemployment. Nowadays we witness the same circle since 2008 global crisis. Each crisis

Because welfare state concept came into prominence with Great Depression, just like emergence of Keynesianism. Welfare state can be defined as the concept of government policies that considers some specific services like sheltering, health, education etc. as basic rights of their citizens and provide these services without requiring any payments and without any discrimination. Welfare state stands between free market capitalism and socialism. One reason that welfarism was implemented is the concerns in liberal states to experience a shift to communist Soviet ideology in their population. Today welfare state regime is most successfully applied in Scandinavian countries (Sweden, Norway) and some other states like Germany,