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Boom vs Bust | How It Shapes our Economic System
Let’s take a look at the events which shaped our economic system over the past few centuries.
The Industrial Revolution (late 1700s)
Did you ever wonder why there is such an imbalance between the wealth of different nations today?
During the Industrial Revolution, the governments of the United States and the United Kingdom had a policy of protectionism. These were enforced heavily via industry tariffs.
This meant that if countries wanted to trade between the US and UK, they would have to pay additional taxes which added an increased cost to goods and services purchased from abroad. This helped to make domestic goods relatively cheaper and more popular.
At the same time, the same governments forced countries in Latin America and Asia into free-trade contracts. This meant trade with these countries bore no tariffs. This led to their economies being exposed to highly competitive Western markets.
This is one of the fundamental reasons why Western economies are some of the most richest and developed.
The Great Depression (1929)
The emergence of the Great Depression eventually led to governments taking more control over the economy. On October 24th 1929, the US stock market crashed which left the economy licking its wounds. Till that point, the US economy was a booming place, a idyllic place: an embodiment of all the promises of a capitalist economy. As far as most Americans were concerned, investment into the US corporate machines could only bring about gains in wealth and profits.
However, this led to a speculative bubble, which caused massively inflated prices of company shares. Eventually, reality kicked in and the value of shares started to decline. This trampled on confidence, leaving few people willing to invest. Companies laid off workers, and unemployment and poverty rose to record levels (up to 24.9% unemployed).
Times were desperate, and the classical view of the economy was not work. Governments had to intervene to better manage the economy. This gave birth to Keynesian economics: a precursor to modern macroeconomics. Keynes believed that governments had to take a more active role in managing the economy, utilising government spending to keep unemployment levels low, and therefore in a confident state.
The US Social Security Act in 1935 was an example of this sort of intervention, where the government transferred money to the population to give back confidence and maintain spending levels. One of the introductions was pensions and unemployment insurance. Even if people couldn’t work, they wouldn’t be forsaken.
Over time, with governments taking a more active role, workers in western economies gradually became increasingly more comfortable and put better faith in their governments. This has, more or less, led us to where we are today.
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