7 - Toward Larger Government Roles

Summary

This chapter covers: the return to unrestrained laissez faire in the 1920s; realization by some economists of some failures in the functioning of free markets; the discovery of monopolistic competition and of potential shortcoming in aggregate demand; Keynes proposes countercyclical fiscal policy to support demand; conservative resistance to changes and views that governmental intervention would inevitably corrupt the role and the efficiency of free markets; fear of contamination from the “Russian communist revolution”; race riots in the United States, fascism in Italy and Nazism in Germany; the impact of the Great Depression on employment and production; growing doubts about free market policies; realization that market operators might not always be constrained by competition but might create cartels and engage in other abuses; Hayek’s Road to Serfdom and his influence; increasingly, many begin to see in a new light a potential role of the government; should the government correct only presumed allocation problems, or also problems in the distribution of income?; the policies of the New Deal in the United States in the 1930s, and the Beverage proposed reforms in the United Kingdom in 1942; making income distribution less unequal became more acceptable; taxes became more progressive; and conservative opposition continued.