Man on the Margin delivers today:
The Keynesian demand-side model began as John Maynard Keynes’ explanation for the Great Depression in his unreadable tome, The General Theory of Employment, Interest, and Money. Keynes Magnum Opus is practically gibberish in its jumbled complexity. Written in 1936, the General Theory is open to so many interpretations that it produced multiple branches of “Keynesianism”. The gist of demand-side theory is that due to “irrational behavior”, “a bubble”, or some other unexplainable phenomenon, the stock market suddenly cratered in 1929 and goods piled up with a disparity between upper classes who desired to save and lower classes who had no money to buy. The solution, in hindsight, was for government to step in and buy the surplus goods by either borrowing from or taxing the upper class and distribute them to the lower class through public works. Monetarist predecessors, close kin of Keynesians, saw the huge pile of surplus goods and believed if only the Fed could expand the “money” in circulation, the excess goods could be purchased without deficit spending, taxing, or borrowing. The market failed and it was up to government to solve the problem unhindered by the automatic monetary constraints of the gold standard. Today, the demand-side model of active government intrusion into the market to stimulate aggregate demand dominates academia, financial media, political policy, and economic thought globally.