Why The Bailout Won't Work - by Pat Barron
The decision by the U.S. government to bailout the banking system is consistent with its Keynesian interpretation of how an economy works, why it stops functioning efficiently, and the methods required to restore its productive capacity. Keynesian theory burst upon the world in the mid 1930s at the height of the Great Depression. Free market capitalist economies, say the Keynesians, are prone to overproduction. Modern industrial techniques allow capitalists to produce more with fewer people, throwing masses of workers on the streets and destroying their financial power to purchase industry's goods.Since the workers can no longer afford to purchase the massive amount of industry's production, factories shut down, throwing even more workers on the streets and destroying even more purchasing power. The free-market economy goes into a death spiral of rising unemployment and rapidly dropping demand for goods. Prices plummet as demand falls, forcing more and more businesses into bankruptcy. The only way to break this calamitous cycle is for government to intervene by increasing demand for goods. It can deficit spend, enforce higher wages for workers, prosecute businesses that dump cheap goods on the economy, and similar actions to bring demand back into equilibrium with supply. Government is the key actor, for only government has sufficient purchasing and regulatory power to counter free market capitalism's inherent weaknesses.
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