Question

1. Describe the assumptions behind the economic philosophy regarding the role of the government in the economy that was prevalent through the 1920s, and the assumptions that drove the changed philosophy in the 1930s and beyond. How does each philosophy view the role of unions?

Answer 1

In 1920s before great depression, Classical economics had prominent place which led to the conclusion that the government intervention is not needed in regulating the economy. Role of government was just to provide security and law and order. The assumption that economy remains at full employment was behind it.

In 1930s, during Great Depression, the assumption of full emploment came into question. Keynes, said that role of goverment is not limited to just law and order. In order to uplift economy from recession, goverment has to take fiscal action to take economy to full employment. This was the new role of government. Assumption behind this role was that economy operates below full employment.

The first philosophy didn't consider role of unions to be significant as wages and prices were fully flexible in classical system of economics.

But second philosophy after 1930 viewed the role of unions to be important in bringing rigidity in wages.