Aggregate Demand Research Paper Starter

Aggregate Demand

(Research Starters)

Economic recovery from social conflict, using government intervention to impact aggregate demand, is an attainable goal under certain conditions. This paper reviews the approaches employed by governments of countries that experienced social and/or civil conflict prior to installation of the reformist regime. The author acknowledges that foreign aid can play a role in the redevelopment of war-torn areas — the examples in this paper will be those for whom foreign aid was helpful but not so significant that it directly shaped or established the regime.

Keywords Aggregate Demand; Economic Development; Economic Policy; Free Market; International Aid; Keynesian Strategy; Macroeconomics

Economics: Aggregate Demand


The World Divided

For most of the 20th century, the world was apparently divided into two separate camps. To the west of what was deemed "the Iron Curtain," governments were formed and operated under democratic principles, whereas eastward, the communist regime held fast. Economically, western infrastructure hinged on the free market and private industry; in the east, the government was the central figure in virtually any business development undertaking.

Of course, this view of the 20th century is at best an overgeneralization of the true situation, which was far more complex. After all, the political environment in the United States diverges considerably from that of France, Germany, Spain and Great Britain (as it does from non-European democracies in Japan, Turkey and India). The Soviet version of Karl Marx's communist ideal differed sharply from the regimes in China, North Vietnam and Cuba. Indeed, the concept of a "bipolar" 20th century world was largely based on generalizations and politically-charged rhetoric: Democracy was democracy and communism was communism.

The truth behind the perceived international economic dichotomy was equally oversimplified. The "People's Republic of China," for example, saw enormous economic strides throughout the 20th century, despite several stumbles back into situations that charged citizens with ethereal, idealistic rhetoric that did little but return that nation to an isolated communist world. Having moved away from the posturing that gave rise to debacles like the Cultural Revolution and the Great Leap Forward, China is now one of the most powerful economies in the world, enjoying unparalleled growth and stature among industrialized nations. The economic architects of China, which was frequently detached from the western world as "just another communist country" and (at least according to party leaders) proud to be labeled as such, felt comfortable departing from Marxist economics and installing the free and private markets that saw success in the West.

Conversely, the United States economy, while ideally free to grow without government intervention, has long featured connections to virtually every level of government. One of the clearest examples of this fact is the American response to the Great Depression of the 1930s. Smoot-Hawley, which raised tariffs and fortified barriers to economic recovery, is a case in point. In fact, one of the most prominent theories of economic development spawned during that same period in US history: The teachings of economist J.M. Keynes. Keynes's concepts, which will be given better light in this paper, entail a call for government-introduced financial infusion into a troubled economy (Stegman, 2004) in order to stimulate aggregate demand. Few adherents to the purist view of a "free market versus communist" world would call Keynes's government bailout representative of the tenets of a western political economy.

Social upheavals and/or conflicts, such as China's Cultural Revolution (during which thousands died and China spiraled into economic collapse) and the Great Depression give credence to an important point. When a nation is struggling to reemerge economically from social conflict, civil war or regime changes, they may find solace in creating linkages between government and the economy in order to stimulate aggregate demand.

This article takes a critical look at aggregate demand as a focal point around which economic recovery from political tumult is often built. Employing the ideals of Keynes and the assessments of political economy experts and observers, this paper reviews the examples of three economies that were hit hard by conflict, drastic regime change or civil war, each of which focuses on aggregate demand as a key to fiscal rejuvenation.


Aggregate Demand

One cannot have a thriving economy without consumers. Aggregate demand, the total demand for goods and services within a nation's economy, hinges on the attitudes of the buying public (National Council on Economic Education, 2007). High prices, product reliability and industry confidence all play a role in aggregate demand and, concurrently, supply. In times of recession, low consumer confidence causes people to reduce their spending and, therefore, aggregate demand flags. Conversely, in times of fiscal health, above-average incomes foster higher demand and consequently, prices. Aggregate demand and supply, therefore, are inversely proportional to one another. The difficulty lies in balancing between the two elements; facilitating economic health without risking inflation or recession. The unenviable task usually falls to lawmakers and regulators.

Enter Keynes

In the 1930s, as the United States suffered the throes of the Great Depression, attitudes abounded as to how to address the situation. For some, signs pointed to the fact that, despite the horrific fiscal state of the union at the time, the United States was in fact continuing to evolve into a prominent world power. In the minds of these economists, the market would correct itself and needed no intervention. Conversely, British economist John Maynard Keynes, in his treatise, General Theory of Employment, Interest and Money, operated from the perspective that the market system was not macro-economically self-sustaining. As one scholar observes, Keynes "thought that the framework of institutions, rules and policies needed to maintain the 'full potentialities of production' was, while not impossible to set up, more elaborate and expensive than that specified by market optimists." (Skidelski, 2005).

As the polarity among economists seeking an end to market tumult continued, a rather interesting irony emerged: The Soviets remained convinced that the market would correct itself, and held off on instituting corrective economic policies. Keynes, however, felt that the keys lied in reducing unemployment, increasing demand and encouraging investment. A comparison of the two economic regimes demonstrates with great clarity which approach proved successful:

“Keynes's economics provided an important aid to the morale of Western society and its leadership, the Great Depression having badly shaken confidence in the free-enterprise economy. Governmental planning in the Keynesian sense prevented a repetition of high unemployment and dizzying consumption and production plunges, while Soviet economic security became arthritic to the point of paralysis. In the longer competition we know who won” (Felix, 2004, p. 62).

As evidenced by the response to one of the worst economic crises in American history, employing fiscal policy in selective arenas of a free market economy (namely, protecting and/or enhancing the demand side) can be seen as a useful tool for economic revitalization, particularly in times of significant tumult. As the following examples demonstrate, targeted corrective measures designed to bolster consumer confidence and investment can help return an economy to the right track as a nation recovers from large-scale conflict and/or upheaval.

Case Studies


When one looks to the international stage for an example of serious discord, he or she may look no further than the Near East. Lebanon is no exception. In 1975, a civil war erupted in which the capitol city of Beirut was shattered into factions, not the least of which was a division between east and west. Sunni, Shia and Druze Muslims as well as Palestinians, Christians, Maronites and other factions took hold of the fractured city. In 1982, Israel entered Lebanon in pursuit of the Palestine Liberation...

(The entire section is 3724 words.)