Debates in macroeconomics from the great depression to the long recession: Cycles, crises and policy responses

325 Pages·2022·5.866 MB·English

by  ARIE ARNON

Springer Studies in the History of Economic Thought
Arie Arnon
Debates in
Macroeconomics
from the
Great Depression to
the Long Recession
Cycles, Crises and Policy Responses
Springer Studies in the History of Economic
Thought
SeriesEditors
HaraldHagemann,UniversityofHohenheim,Stuttgart,Germany
MurielDalPontLegrand,UniversitéCôtéd’Azur,SophiaAntipolisCedex,France
RobertW.Dimand,BrockUniversity,StCatharines,ON,Canada
Hans-MichaelTrautwein,CarlvonOssietzkyUniversityOldenburg,Oldenburg,
Germany
AdvisoryEditors
ArieArnon ,DepartmentofEconomics,Ben-GurionUniversityoftheNegev,
Beer-Sheva,Israel
TonyAspromourgos,UniversityofSydney,Sydney,Australia
MichaëlAssous,LumièreUniversityLyon2,Lyon,France
VladimirAvtonomov ,HigherSchoolofEconomics,Moscow,Russia
KatiaCaldari,UniversityofPadova,Padova,Italy
JoséLuísCardoso,UniversityofLisbon,Lisboa,Portugal
AnnieL.Cot ,MaisondesScienceséconomiques,Pantheon-SorbonneUniversity,
Paris,France
AlexandreMendesCunha,UniversidadeFederaldeMinasGerais,BeloHorizonte,
Brazil
ArianeDupont-Kieffer,UniversitéParis1Panthéon-Sorbonne,Paris,France
EvelynForget,UniversityofManitoba,Winnipeg,Canada
YukihiroIkeda,KeioUniversity,Tokyo,Japan
MarianneJohnson,UniversityofWisconsinOshkosh,Oshkosh,WI,USA
HeinzKurz,UniversityofGraz,Graz,Austria
Jean-SébastienLenfant,UniversitédeLille,Lille,France
QunyiLiu,PekingUniversity,Beijing,China
MariaCristinaMarcuzzo ,SapienzaUniversitàdiRoma,Rome,Italy
SylvieRivot,UniversitédeHaute-Alsace,Mulhouse,France
MargaretSchabas,UniversityofBritishColumbia,Vancouver,Canada
BertramSchefold,JohannWolfgangGoethe-Universität,Frankfurt,Germany
RichardvandenBerg,KingstonUniversity,Surrey,UK
IsabellaMariaWeber,UniversityofMassachusettsAmherst,Amherst,MA,USA
CarloZappia,UniversitàdiSiena,Siena,Italy
This series offers an outlet for research in the history of economic thought. It
features scholarly studies on important theoretical developments and great
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limitedto,variousschoolsofthought,importantpioneersandthinkers,ancientand
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Arie Arnon
Debates in Macroeconomics
from the Great Depression
to the Long Recession
Cycles, Crises and Policy Responses
ArieArnon
DepartmentofEconomics
Ben-GurionUniversityoftheNegev
Beersheba,Israel
ISSN 2662-6098 ISSN 2662-6101 (electronic)
SpringerStudiesintheHistoryofEconomicThought
ISBN 978-3-030-97702-3 ISBN 978-3-030-97703-0 (eBook)
https://doi.org/10.1007/978-3-030-97703-0
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ToRuthmybelovedpartnerinlifeforover
almosthalfacentury,
ToInbal,ourdaughter,toAdamourson,
ToAlma,NoamandDaniel,our
grandchildren,
Whobringmuchjoyandlovetoourlives.
Wishingandhopingforyourwonderful
future.
Praise for Debates in Macroeconomics from
the Great Depression to the Long Recession
“Whenthe2008crisisstruck,macroeconomistswerecaughtwithmodelsthatwere
theoreticallyelegantyetinappropriatetotheneedsofthemoment.Abroaderhistor-
ical perspective may have prevented the jettisoning of Keynesian models that had
provedusefulinthepastandmighthavedonesoagain.Thishighlyreadablebookby
ArieArnonisawonderfulantidotetoeconomists’shorttimehorizonandcontributes
mightily to restore the profession’s “collective memory” of the diversity of ideas
withinmacroeconomics.”
—Prof.DaniRodrik,HarvardKennedySchool
“Alltoooftenoverthelastcentury,macroeconomicideas(notalwaysthesameones)
havebeensuccessfullymarketedandthenadoptedaselixirsofgeneralprosperity.
Nowadays,theirconsumersaredemandingthattheybebottledwithwarninglabels.
This thoughtful and learned book offers a fascinating and sometimes-provocative
accountofhowallthiscameabout.Itshouldbereadbyanyonewhoistroubledby
thecurrentstateofthesub-discipline.”
—DavidLaidler,ProfessorEmeritus,UniversityofWesternOntario
“ArieArnonhaswrittenanexcellentdescriptionofthemainmacroeconomicdebates
inthe1930s,particularlythedebatebetweenthosewantingmore,orless,government
intervention,KeynesversusHayek.HegoesontoshowhowKeynesiananalysisgave
wayfirsttomonetarismandthentothenewclassicalmacroeconomics.Hecriticises
the new classical macroeconomics, primarily influenced by Lucas, on the grounds
ofexcessivesimplicity,unduerelianceon‘representativeagents’,andincapacityfor
givingasatisfactorymodeltreatmentofcrises,asin2008andnowagainwithCovid.
Allthisisverynicelysetout,wellwrittenandeasilyaccessible,butIwouldhave
liked more guidance on a better direction of travel for macroeconomics from here
onwards.”
—CharlesGoodhart,CBE,FBA,ProfessorEmeritusofBankingandFinancewith
theFinancialMarketsGroupattheLondonSchoolofEconomics
vii
viii PraiseforDebatesinMacroeconomicsfromtheGreatDepression...
“This book tells the story of how macroeconomics gained momentum during the
GreatDepressionandlostitduringtheGreatModeration,untilthe2008crisisforced
economiststocometogripwiththerealityoftheinstabilityoftheeconomicsystem
asawhole.Theargumentsarepresentedwithgreatclarityandascholarbackground
of the literature. A recommended reading for anyone concerned with the issues at
stakeincontemporarycontroversiesineconomics.”
—Prof.CristinaMarcuzzo,Sapienza,UniversitàdiRoma
“Whether one agrees with his analysis and conclusions or not, Arnon’s tome is a
very important contribution to the literature on the historical interaction between
economic theory and policy in the 20th and 21st centuries. Indeed, it may be said
thathehasdonefortheGreatRecessionwhatHaberlerdidfortheGreatDepression.”
—WarrenYoung,ProfessorEmeritus,Economics,BarIlanUniversity
“A reconsideration of the macroeconomics debates since the Great Depression is
crucial both for building better macroeconomic analysis and for improving policy
choices.ProfessorArnon’sbookisveryvaluableinthisrespect,providingabrilliant,
widesurveyoftherelevantliteraturewithaninterestingpersonalperspective.”
—Prof.AlessandroRoncaglia,AccademiadeiLinceiandSapienza,
UniversitàdiRoma
“Inhisnewbook,DebatesinMacroeconomicsfromtheGreatDepressiontotheLong
Recession,ArieArnon,aneminenthistorianofclassicalmonetarytheory,hasturned
hisattentiontothehistoryofmacroeconomicsoverthepast90years.Hiscarefully
researched, insightful and even-handed account of these debates will be read with
profitbyawideaudienceseekingtounderstandhowmodernmacroeconomicsarrived
atitscurrenttroubledstate.”
—Dr.DavidGlasner,AnEconomist
“Macroeconomics inthefaceofeconomic crises:fromtheinnovations elicitedby
theGreatDepressionofthe1930stotheunpreparednessanddoubtsofrecentyears.
Anilluminatingreconstructionofalmostacenturyofconflictingtheoriesand,above
all,conflictingvisionsofhowthemarketeconomyworks.”
—Prof.AnnalisaRosselli,AccademiadeiLinceiandUniversityofRome
TorVergata,Italy
PraiseforDebatesinMacroeconomicsfromtheGreatDepression... ix
“Arie Arnon’s long career as a distinguished historian of economic thought has
centeredontheperennialcontroversiesofmonetaryeconomics.InthisbookArnon
providesasure-footedanddeeply-informedreviewoftheoriginsofmacroeconomics
in Keynes’ General Theory and its fate at the hands of Hayek, Friedman, and the
mathematicsoftheNewClassicalMacromovement.Thisisasadscientifictaleofa
GreatForgetting,asthepreciouspracticalpolicyinsightsKeyneswrestedfromthe
Great Depression slipped into the obscurity of Dynamic Stochastic General Equi-
libriumorthodoxy.Thosewhoforgetthepast,wearetold,arecondemnedtorepeat
it.”
—Prof.DuncanK.Foley,LeoModelProfessorofEconomics,NewSchoolfor
SocialResearch
“Arie Arnon has produced an important new book about the history of macroeco-
nomicsbetweenthe1929andthe2008economiccrises.Thisisaverychallenging
project,whichArnoncarriedoutquiteefficiently.Thebookshedsnewlightonkey
macroeconomiccontroversies,fromKeynesvsHayektoFriedman,NewClassical
Macroeconomics, New Keynesians and Post Keynesians. Such a comprehensive
insightful account of the history of macroeconomics should not fail to attract the
attentionofhistoriansofeconomicsandmacroeconomistsalike.”
—MauroBoianovsky,UniversidadedeBrasilia
Preface: Macroeconomics Facing a Ghost—2008
and the Threat of a New Depression1
Debates in Macroeconomics from the Great Depression to the Long Recession
reexamines some of the major schools in macroeconomics theory, focusing on
their analysis of cycles, crises and the consequences they drew for macro policy.
The book explores the rise of macroeconomics after the Great Depression and its
significantparadigmatictransformationintheyearsleadingtotheLongRecession
that started in 2008. Those years witnessed changing attitudes toward the fragility
of the capitalist system and saw first the rise and then the decline of “active”
macropolicy.ThegreaterthetimespanfromtheGreatDepression,themoremost
macroeconomists tended to downplay the system’s fragility and the threats of a
secondGreatDepression.Afterall,“It”—theinfamousspecterhauntingeconomics
since the 1930s, that of another depression—has not happened again, though, as
weallknowbynow,2008broughtscarymomentsfortheglobalfinancialsystem,
transmittingthreatswhichalarmedpolicymakersaswellasacademiceconomists.
1Iaminmassivedebttoscoresofpeopleandsomeinstitutionswhohelpedmeinmanydiverseways
alongthelongpathtobringthisstudytoconclusion.Istartedthinkingaboutthisprojectnotlong
afterthe2008crisis,afterIpublishedastudyabouttheslowriseofmonetarypolicyineconomics
throughoutthelongnineteenthcentury(Arnon2011).Duringthefirstphaseofmovingtoresearch
thehistoryofmacroeconomicsinthetwentiethcenturyandparticularlyhoweconomistsanalyzed
economiccrises,IreceivedagrantfromTheInstituteforNewEconomicThinking(INET)for
whichIamgrateful.IspentseveralproductiveperiodsvisitingtheInstituteforResearchonLabor
andEmployment(IRLE)atUCBerkeley,wasaprofessorialresearchassociateintheDepartment
of FinancialandManagement StudiesatSOAS, London, andduring 2017–2019 wasavisiting
scholarattheHarvardKennedySchool’sMossavar-RahmaniCenterforBusiness&Government.
IcompletedimportantpartsoftheMSinthosevisits.Iwouldliketoexpressmydeepthanksfor
thesupport,hospitalityandintellectualenvironmentIfoundalongtheway.Mythankstoscores
of persons are recorded in an acknowledgements section that can be found at the end of this
Preface.Here,IregistermyhugedebttoProf.HaraldHagemannwhoreadandcommentedonall
thechapters,criticizing,askingquestions,suggestingimprovementsandraisingideasforfurther
researchthatarebeyondwhatoneusuallyobtains.Thenumberofpeoplewhohelpedmealong
the way, in discussions, sharing doubts and also by sending encouragements, as you could see
intheAcknowledgmentsbelow,ishigh.Noneofthemisresponsiblefortheviewsinthisbookor
foranyremainingfactualerrors;theyareallmyfault;thus,theusualcaveatcertainlyholdsforall
thoseImention.
xi