a cure to economic distress

Jamie Bell January 2011

A Cure to Economic Distress

Economics, it may be argued, can be reduced to the study of how individuals in

societies meet their needs and wants. The source makes reference to the author’s opinion

about the appropriateness during times of depression. Liberalism, as an economic ideology,

offers many options for citizens and governments in terms of dealing with periods of

economic distress. On one hand individuals who ideology favours the right side of the

political spectrum, like Adam Smith, believe the government does not have a role to play in

the economy even during times of distress. Classical liberals believe if producers focus on

making individual profit they will unintentionally benefit the consumers. On the other hand

individuals whose ideology reflects the left side of the political spectrum believe the

government needs to have a direct role in the economy because they have the power to

create additional social programs to generate more jobs which decreases unemployment

and cut taxes to relieve some of the pressure on the individuals. When faced with the

question concerning to what degree the perspective of the source should be embraced one

might argue that we should partially embrace the source because individuals need to be a

part of fixing the economy by spending money and producing and consuming goods.

However there still needs to be some government involvement to regulate and help control

what the individuals cannot.

Some may argue that complete government intervention is the only option to deal

with the periods of economic distress. These people feel the government needs to have a

direct role in the market because the government has the power to develop more social


programs or laws to form employment opportunities, and cut or increase taxes which is

essential in giving the people hope for recovery of a depression. Although the government

has the power to change a lot in the economy, giving them a direct role does not recover

the market. The government does not have the right to take from one to give to another.

For instance, increasing taxes to redistribute wealth takes away an individual’s right and

freedom to private property. If the government is given the responsibility of recovering the

economy, many argue they forget about preserving the essential freedoms that individuals

are guaranteed in the market such as private property and freedom of choice. It has been

questioned that excessive government control of the economic aspects of life could

definitely lead to government interfering in part of citizens socials lives, and that could

become a danger to the liberty of the individual. It is argued that many feel legislative

action will cause unrest within the people because any law created will be to improve the

economy and not focus on improving the lives of the individuals. For example, Keynes

economics believed in decreasing taxes and interest rates and increasing government

spending in times of recession, but then to also increase taxes and interest rates during

times of inflation. Some democratic governments accepted Keynes advice to spend money

during hard times but did not implement his ideas to cut spending and increase taxes and

interest rates during prosperous times because they felt they would become disliked by the

voters. This resulted in large government debts which did not help the economy with the

depression. Although the action the government portrayed seemed convincing at the

beginning because individuals were paying fewer taxes, it ended up hurting the

government and the people. If the government does not follow the entire plan it can create

more distress towards the government and the people which will not improve the


economy. Another example would be Ronald Reagan’s philosophy of trickle-down

economics. This philosophy consisted of reducing income and business taxes, decreasing

regulation on businesses and increase government spending on the military. Reagan’s

policies favoured the industry, assuming that if the industry is succeeding then everyone

will benefit as the money will “trickle down”. As statistics show, between 1972 and 1977

the richest ten percent of the United States was earning thirty three percent of the income.

When Reagan introduced trickle-down economics the wealthiest ten percent were earning

an increasing forty one percent of the country’s total income. It was then proved that

Reagan’s philosophy of trickle-down economics did not help distribute the wealth to all

classes of people; it only benefitted the already wealthy individuals.

The source is stating that economic wounds must be healed by the action of the

individuals without the help of government. Many argue that this is the key to the success

of recovering the economy during a depression because producers and consumers

inadvertently control the supply and demand of goods. These people state, if producers

focus on making individual profit they will unintentionally benefit the consumers because

they have quality goods to purchase. Embracing the source completely will not improve the

distress of the economy because in times of suffering an individual’s reaction is to hoard

their money because it is scarce in a time of depression. The government then cannot rely

on consumers to spend money on products to boost the market because the people do not

feel comfortable spending their money in an unstable market if it is not necessary. In a very

individualistic society because of self interest and self reliance the individuals will not be

focussing on situations to benefit the majority, they will be determined to do what is best

for them and their family. David Ricardo’s Iron Law of Wages states; if you leave the


responsibility of reducing unemployment numbers to the individuals more jobs will not be

established and wages will not increase because everyone is desperate for jobs. The wages

remain low because everyone will work for less than everyone else. This means there is no

determined minimum wage to create a safety net for the working class. An example of a

situation that embraced the source and was unsuccessful was Britain’s Prime Minister

Margaret Thatcher’s philosophy of Thatcherism. The creation of Thatcherism was to reduce

government involvement in the economy and increase economic freedom and

entrepreneurship with preserving classical liberal principles. Thatcher took a solid line

with labour unions which caused strikes within the people because they disagreed with

Margaret’s constraints on labour movements.

We should partially embrace the ideological perspective presented in the source

because the producers and consumers are an important part in healing the wounds of an

economic depression, but at the same time limited government intervention is equally

important to regulate and control the aspects of an economy the individuals cannot. A

mixed economy is the best way to repress the wounds caused by a depression because it

allows the government to create social programs that may help drive the economy and

allows the individuals the freedom to choose to buy into the programs depending on

personal choice. Having a mixed economy allows the government to change the taxes and

interest rates to benefit the individual which leaves money in the pockets of the people

who will then feel comfortable spending money, which the government believes is

important in recovering the market. During rough times in the economy the government

and the individual need to work together because the government can control the supply of

products but they never know enough information about the demand which the individuals


know much about. An example of a mixed economy creating a successful journey out of

depression is the Polder Model created in the Netherlands. The Polder Model was an

exceptional system that played a huge role in the recovering of an economy. It was created

in the 1980’s after a long period of refusal in the Dutch economy. The Polder Model

included employers, unions, and the government working as one to make decisions that

would help avoid strikes which would directly help stabilize the economy. Another

example of an economy that balanced trade unions, public ownership, a strong welfare

state, government intervention and the redistribution of wealth is Blair’s Third Way. The

Third Way was a shift to a more moderate system that adopted some aspects of

Thatcherism and free market policies while developing some social programs. Allowing

the government and the people to have equal roles in times of hardship in the economy

allow decisions to be made that create a peace between the two groups. In the end

everyone is satisfied because each group gets to do their own job and contribute. When the

government and the people work together there could be arguably better solutions to the

recovery of the depression because each group understand the opposite side and can

create a plan that benefits everyone.

We should partially embrace the ideological perspective stated in the source

because individuals and the government need to work closely since each cannot control the

entire aspects to recover a depressed economy. The individuals can control the supply and

demand of products but the government needs to create programs to increase employment

and cut taxes and interest rates so the people have more money to comfortably spend in

the economy.

a cure to economic distress

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