Modern Economic Theories- Essay, Research Paper

Modern Economic Theories-

Two controversial economic policies are Keynesian economics

and Supply Side economics. They represent opposite sides of the

economic policy spectrum and were introduced at opposite ends of the

20th century, yet still are the most famous for their effects on the

economy of the United States when they were used.

The founder of Keynesian economic theory was John Maynard

Keynes. He made many great accomplishments during his time and

probably his greatest was what he did for America in its hour of need.

During the 1920 s, the U.S. experienced a stock market crash of

enormous proportions which crippled the economy for years. Keynes knew

that to recover as soon as possible, the government had to intervene

and put a decrease on taxes along with an increase in spending. By

putting more money into the economy and allowing more Americans to

keep what they earned, the economy soon recovered and once again

became prosperous. Keynes ideas were very radical at the time, and

Keynes was called a socialist in disguise. Keynes was not a socialist,

he just wanted to make sure that the people had enough money to invest

and help the economy along.

As far as stressing extremes, Keynesian economics pushed for a

happy medium where output and prices are constant, and there is no

surplus in supply, but also no deficit. Supply Side economics

emphasized the supply of goods and services. Supply Side economics

supports higher taxes and less government spending to help economy.

Unfortunately, the Supply Side theory was applied in excess during a

period in which it was not completely necessary.

The Supply Side theory, also known as Reganomics, was

initiated during the Regan administration. During the 1970 s, the

state and local governments increased sales and excise taxes. These

taxes were passed from business to business and finally to the

customer, resulting in higher prices. Along with raised taxes for the

middle and lower classes, this effect was compounded because there was

little incentive to work if even more was going to be taxed. People

were also reluctant to put money into savings accounts or stocks

because the interest dividends were highly taxed. There was also too

much protection of business by the government which was inefficient

and this also ran up costs, and one thing the Supply Side theory was

quite good at was reinforcing inflation.

The two opposites of the Supply Side and Keynes theories are

well matched theories, but it was the time of use that made them good

and bad. Keynes theory was used during that aftermath of the Great

Depression, a catastrophe America will never forget and will never be

able to repay Keynes for the economic assistance in recovering from

it. The Supply Side theory was used after a long period of prosperity,

and although seeming to continue the practices of the past

administration, was the cause of a fearful recession. The success of

those or any economic theory is based on the time at which it is

implemented.