The Limitations Of The Macroeconomic Theories: The Case Of The Oil Crises (1973-1982)

The limitations of the Macroeconomic Theories:
The Case of the Oil Crises (1973-1982)

The purpose of this essay is to analyze the occurrences that lead to the oil crisis in 1973 and 1979 in the particular case of the US and how the leaders of the time through macroeconomic policies play a key role in the future events of the country and in particular of the economy. First I will do a briefintroduction to Keynesian theory because we should remember that the policies that were implemented to overcome the crisis known as the Great Depression were based on the theories of John Maynard Keynes in the 1930’s, then I will examine the policies made by the US presidents at the time and show how they represent a particular school of economic thinking based on the reading of Charles Morris “TheTwo Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash” always thinking about the effectiveness of their policies. Finally I will explain the effects of those measures and I will do a brief parallel with the current crisis in the US, trying to predict a possible scenario of the economic future of the country.

At the time when Keynes began to make their theories, herealized that he was living in a time of huge unemployment, but it was believed that by cutting wages, the economy would adjust, and automatically reduce unemployment. In other hand, Keynes believed that the state should take a central role in the issue and should interveneas far as unemployment was seen; therefore thegovernment complements the market to solve this problem. To meet this purposethe State should increase public spending during periods of recession, and this will generate additional demand to assist the increased investment, and thus increase occupancy/employment and that each time you give in to such problems, the state should intervened to eliminate economic fluctuations.

For Keynes, there are certain factors that influenced the investment in an economy; savingdecisions have an influence in individuals consumers due to the fact that the consumption function depends on income, while investment depends on thedecisions that business took, according to a function of expectations, and in this point we found a critique of Hayek theory;pointing out that savings and investment had no incentive to coincide. When employers have high expectations of investment, arewilling to invest more, causing economic growth, if the opposite happens, the state would prevent the fall in demand, increasing their own expenses.

During the years 1965-69 the Vietnam War and prosocial programs launched during the Johnson administration favoreda moderate rate of operation of the American economy, which reached a level of employment withoutprecedents. Moreover, the inabilityto financewar and those social programs with the state revenue, Taxes,led to a sharp increase in the inflation rate,which rose from an average of 2 in the early years of the decade to a 5.5 in 1969 and since that year, the current accountU.S. balance was in deficit.Meanwhile in West Germany the short recessionsuffered in 1966 and 1967 led to an expansionist policythat generated a period of unprecedentedgrowth in 1968and lasted until 1970. This economic expansion spread over Western Europe. Then between 1967 and 1970 took place subsequent changes in the exchange rates of different currencies:devaluation of the pound, revaluation of the mark, French franc devaluation, floating Canadian dollar. Meanwhile, around this time began to emerge growing doubts about the strength of the dollar, whichworsened with the picture ofmomentary international illiquidity in 1969 favored the creation of Special DrawingRights (SDR). All these reasons contributed to increased currency speculation to levels unknown in the postwar period.

In 1969 Richard Nixon became president of the US, and with him, the first and extremely important changed was the elimination of the gold standard and with it came the...