 What I'm going to talk about this afternoon is the significance of the great British economist John Maynard Keynes. Keynes may be one of the three most influential economists who's ever written. I would say maybe Adam Smith, Karl Marx, and Keynes may be the three most influential economist. Keynes is thought of as the father of modern macroeconomics. Macroeconomics is different than microeconomics. Microeconomics means the study of individual firms and households and how they make decisions and how markets coordinate or don't coordinate their interactions. Macroeconomics looks at major sectors of the economy kind of aggregated up. So everyone who is a consumer goes in a household sector to determine how they make decisions about consumption and savings and all businesses go in a business sector, the government goes in the government sector and the last sector is the foreign sector or basically trade. So what Keynes did was to create a theory of these sectors, how each of the parts of the sectors, the household, the business community and foreign trade acted and then how they interacted with each other and had this determined the behavior and the performance of our economy. Now it's important to understand Keynes or to situate him to understand that Keynes, that there's always been a kind of a conflict of visions of how a private property capitalist economy behaves. On the one hand, there's a laissez-faire view which comes from the French meaning leave it alone. That laissez-faire view says that if the government stays out of the market system, then the market system will produce ideal results, everybody will be happy, will have full employment, everyone will be as well off as they can possibly be. Opposed to that, there's a view that says that, well, capitalism works fine sometimes, but it's very dangerous. It has booms and busts, it's volatile, it can sink into depressions, it creates inequality, it creates poverty. So in order to have a market system, you have to have a strong public hand to regulate it and to kind of control it. Keynes is on the critical side of the debate. In fact, Keynes is a much more radical critic of laissez-faire capitalism than your textbook will tell you for reasons which maybe we'll discuss on another video. This conflict between these two views goes back and forth over time, but the Great Depression was this tremendous event which essentially destroyed for many decades the view that laissez-faire was okay. So in the United States, in the 1920s, we had a tremendous financial market boom, we had a tremendous rise in inequality, we then had a financial market collapse. Following that, we had a collapse in the real economy in which GDP fell by almost a third and unemployment went to 25%. And we stayed within that collapse system for a decade, really. We didn't get out of it until World War II. So in that period of time, Keynes published his major work, The General Theory, in 1936 and essentially presented his view of why things went wrong. And his view had always been that things can go wrong, that investment is volatile, financial markets are volatile, capitalism is capable of producing these collapses and not getting out of them. And he also produced his theory of policy or what the government should do to get out of this situation. So if businesses won't spend money on investment goods because there's no markets, no one can buy profits are low to nonexistent, and if households can't spend money on consumption goods because people aren't working, there's 25% unemployment, incomes are low, people are frightened, no one wants to spend anything extra. If the financial system has collapsed and no one can get loans, then basically there's no inherent mechanism in the system to generate a rebirth and to move us back to full employment. So Keynes argued that the government is one of these four sectors and the government's quite capable of intervening in the economy to stimulate growth. So what can the government do? Well the government can do a number of things. The Federal Reserve can try to make loans easier to get, interest rates low. But in a situation like the 1930s, with massive unemployment and massive excess capacity in business, really the government's the only person who can kind of come in and spend money and get the system moving again. So the government in fact, after 1932, did spend money and had deficit spending and had programs to stimulate the economy, including the direct employment of millions of people in the Civilian Conservation Corps and the Works Project Administration. And this helped create a regrowth, an increase in growth in the economy from 1934 through 1937. But it wasn't big enough to do the job and the government, as it's kind of doing today a little bit, was looking and saying maybe we shouldn't accumulate too much debt, maybe we shouldn't run deficits that are too large. And so we'll cut back and we won't spend so much money. So by the time that we got to 1939, the unemployment rate was still 17 or 18 percent and we never got out of this depression until World War II. Now when World War II came, the economy just under government control had a complete rebirth. We sent millions of people into the armed services and still produced more consumption goods than we had in 1939. And the combination of the depression and World War II I think convinced almost everyone that the laissez-faire view was completely faulty. And Keynes was right. Moreover, not only does laissez-faire economics not guarantee that the economy will work well, in a situation like the 1930s, it generates political instability and revolt and unrest and it scares everyone in the society. So Keynes turned out to be right. Everyone became Keynesian and the economy under Keynesian policies prospered from World War II into the 1970s, at which point there were some problems and there was a revolt again and Ronald Reagan came in and we began to move towards deregulation, laissez-faire. And as Reagan said famously, the government's not the solution to your problems, the government is your problem.