Copyright © 2015 Meghnad Desai All rights reserved This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press) without written permission from the publishers For information about this and other Yale University Press publications, please contact: U.S Office: sales.press@yale.edu www.yalebooks.com Europe Office: sales@yaleup.co.uk www.yalebooks.co.uk Typeset in Arno Pro by IDSUK (DataConnection) Ltd Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Control Number: 2015933801 ISBN 978-0-300-21354-6 A catalogue record for this book is available from the British Library 10 CONTENTS List of Figures Preface Acknowledgements Introduction: Unraveling the Threads Part I The Building Blocks Cycles for the Curious New Tools for a New Profession Part II Causing a Stir Declining Fortunes Part III The New Globalization The Search for an Answer Notes Bibliography Index FIGURES Marshall’s Cross Keynes’s aggregate demand and aggregate supply curves Hicks’s version of Keynes The Phillips curve Friedman’s version of the Phillips curve The Goodwin cycle Lucas’s version of the Phillips curve New classical aggregate demand and aggregate supply PREFACE In July 2007, I was invited by the Ministry of External Affairs, Government of India to give a talk to a group of Foreign Services Officers on the prospects for the global economy The group consisted of 150 people of a variety of ages and included ambassadors and senior diplomats The discussion quickly turned to the global boom and I was asked by a senior diplomat from Brazil whether this boom would last Over the course of my many years within the field of economics, I have learnt that there are two things that are certain; the longer a boom lasts, the more people buy into the idea that it will carry on forever and, secondly, the longer the boom, the greater the likelihood it will end soon But economics is not an exact science so I could not give the diplomat a precise date for when the boom would end; just the certainty that a turning point would come and it would be sooner than he thought By mid-2007, two events had taken place, in quick succession, which indicated that the global economy was changing direction The first occurred in the autumn of 2006 when the US housing market bubble burst; this was followed by the collapse on the Shanghai stock market in February 2007 These events were, at the time, viewed as isolated incidents, unconnected to the larger web of the global economy During the Great Moderation, words like capitalism and business cycles were no longer a part of the vocabulary of modern economics used by self-respecting economics departments Perhaps because of this, when the crisis finally hit, its severity took some time to register Just as in World War I, belligerent nations expected the troops to be home within four months, by Christmas, many economists took the view that the crisis was temporary and self-correcting Others said that while the crisis was serious, we had the means to solve the problem The first batch were the New Classicals and the second Keynesians My own view was that this recession was not only one of the deepest we had ever seen, but also that the usual Keynesian remedies would not work In February 2009, as the British Prime Minister Gordon Brown was proposing a massive internationally coordinated Keynesian reflation package at the G20 summit in London, I wrote an article for the online edition of a major UK newspaper about the perils of following a Keynesian policy solution.1 It was clear to me that the cure would not come from a repetition of the old policies of borrowing and reflation Globalization had fundamentally changed the context To find a solution to the crisis we needed to explore the “underworld,” as Keynes described it, the world where economists who had gone out of fashion lived Karl Marx, Joseph Schumpeter, Nikolai Kondratieff, Friedrich Hayek (and even Knut Wicksell, who was still read but not understood) viewed capitalism as a system which was subject to the waves of up and down cycles – as a dynamic disequilibrium system Modern economics views the market as a stationary equilibrium system – where decisions taken are compatible, so in essence supply equals demand When he came to office in January 2009, Barack Obama understood that the financial collapse had created a problem for the real economy He launched a program for reviving the economy of nearly $800 billion which would have been right for a “normal” recession Six months later, Alistair Darling, the British Chancellor of the Exchequer, became the first senior politician to recognize that the severity of the crisis was unprecedented British elections were imminent by the autumn; along with my colleagues in the House of Lords, we were discussing what should go in the Labour Party’s manifesto I recall venturing that there was no money for any spending initiatives The contest was going to be about whether Labour could austerity better than the Conservatives The answer came from above that we were not talking of austerity but of investment and growth Undaunted, in February 2010, along with a group of 19 other economists I signed a letter to the Sunday Times saying that, whichever party came to power, its government would have to cut the budget deficit within one Parliament Among my fellow signatories were my colleagues at the London School of Economics Tim Besley and Christopher Pissarides (Nobel Prize 2012), David Newbery from the University of Cambridge, Tom Sargent from New York University (Nobel Prize 2011), Ken Rogoff from Harvard, and others I was the sole signatory who had a political affiliation There were two contrary responses in the form of letters to newspapers from my Keynesian friends Lord Richard Layard and Lord Robert Skidelsky, with many, many, more signatures for each In the United States Paul Krugman was arguing strongly for a massive fiscal boost, while the New Classical economists of Chicago and Minnesota were skeptical of the need for, or the effectiveness of, any stimulus Only among the central bankers of the United States and the United Kingdom was there agreement that the money supply had to be boosted by quantitative easing Four years later and with hindsight, we can see that the crisis was severe – one of the deepest ever We also know that the recovery is fragile, at best, in the UK and the US, and non-existent in the eurozone With the possibility that the recovery may be destabilized by the slightest wrong turn, now is an opportune time to reflect on what went wrong The problem was not so much with the economy but more importantly with economics and economists I want to address some of the questions that have been raised about economics: why economists failed to predict the crisis, what happened, why it happened when it did, and why economists won’t admit that they were wrong I also want to address the criticisms of the overuse of mathematics in economics and to see whether there is a new economics which can cope with future economic catastrophes better I write as someone who has lived through and even participated in the changes in economics that I describe herein During my 50-plus years as an economist, I was a Keynesian while a student and in the first decades of my career I battled against monetarism, writing articles and a book But I also explored political economy in the works of Marx, Schumpeter, and Hayek through my entire career as an economist As time went on, I witnessed the change in the culture of academic economics It abandoned empirical habits of studying the economic reality and became wedded to aprioristic reasoning which replaced skeptical inquiry Uncertainty and doubt were replaced by certainty and hubris I tried my best to resist it I continued trying to interpret the world anew in light of events with the tools of empirical research combined with a deep grounding in the heritage of economic theory It continues to be an unfinished task It is this change that I wish to bring home here I hope readers will gain some insight from reading this book Meghnad Desai, “Keynesianism Isn’t Working,” Guardian, Feb 16, 2009 ACKNOWLEDGEMENTS I must mention Robert Skidelsky for many close encounters over coffee and claret in the Bishop’s Bar in the House of Lords where we discussed many of the themes of this book A chance meeting on a train with Vernon Bogdanor gave me encouragement to finish what I had begun as a long note to myself David Marsh read an early version and directed me to Yale where Taiba Batool read the manuscript and told me how to make an ugly duckling into a better looking duck though not quite the swan she would have liked To all my hearty thanks INTRODUCTION Unraveling the Threads The Great Recession has been the deepest since the Great Depression of the 1930s For the vast majority of people this has been the biggest economic upset of their lives They may have heard stories about the Great Depression – the advent of Hoovervilles in the US and the hunger marches in the UK – but their lives have been spent in more comfortable circumstances The trigger was a financial crisis that quickly spread through the economies of the Western world with debilitating consequences The events that began with the decline of the housing market in the US and climaxed in the bankruptcy of Lehman Brothers resulted in a set of circumstances which fits the definition of a financial crisis: A sharp, brief, ultracyclical deterioration of all or most of a group of financial indicators – short-term interest rates, asset (stock, real estate, land) prices, commercial insolvencies and failures of financial institutions.1 This initial shock was followed by the loss of output and of jobs, which is now being called the Great Recession Across the Western world there have been certain similar developments The effects of the recession continue to be felt five years on Although the global economy has now started to show the signs of a recovery, it will be many years before economic indicators return to precrisis levels This was a crisis which was largely unanticipated by economists, financiers, and policy-makers and it has prompted questions about why it happened and how it was allowed to happen, since even as the economies of the US and UK are beginning a fragile recovery, there is still a lot of misery in the eurozone and Japan What Happened? August 15, 2007 was a significant day Apart from being the sixtieth anniversary of Indian independence, it was also the thirty-sixth anniversary of the day on which President Richard Nixon announced that the US would renege on its obligation to buy gold at $35 an ounce That obligation had been the foundation of the postwar system of exchange rates known as the Bretton Woods system It was named after the town in New Hampshire where in July 1944 the Allies had met and hammered out the postwar order for international monetary relations The Bretton Woods system kept all exchange rates fixed in relation to the dollar, while the dollar was fixed in terms of gold This was the Dollar Exchange Standard It replaced the Gold Standard that had been around for 300 years prior to World War II Nixon’s rejection of the obligation to buy gold at a fixed price ushered in an era of flexible exchange rates It gave birth to the world we know today with changing exchange rates and easy conversion from one currency to another This time, August 15 was to be a memorable day for Timothy Geithner The 46-year-old fixed costs (i) flexible exchange rates (i) food prices (i) foreign aid (i) foreign exchange Asian countries (i) dealing (i), (ii) levels of transactions (i) theory of rates (i) foreign investment, liquidation (i) forward trading (i) France Keynesian experiment (i) occupation of Germany (i) FRB-MIT-PENN model (i) Freddie Mac (i) free movement, capital and labor (i) free trade (i), (ii) French Revolution (i) Friedman, Milton (i), (ii), (iii), (iv) A Monetary History of the United States (with Anna Schwartz) (i) A Theory of the Consumption Function (i) Frisch, Ragnar (i), (ii) full employment (i), (ii), (iii) future developments, optimism/pessimism (i) Gaitskell, Hugh (i) Galbraith, John Kenneth (i) The Affluent Society (i) Garicano, Luis (i) Gates, Bill (i) Geddes Axe (i) Geithner, Timothy (i), (ii), (iii) general equilibrium theory (i), (ii) Germany, post-World War I (i), (ii) Glass-Steagall Act (i) global economy, growth poles (i) global imbalances (i) global interdependence (i) globalization (i) acceleration (i) effect on interest rates (i) effects of (i) events (i) inapplicability of Keynesian models (i) market economy (i) nineteenth-century (i) glut, possibility of (i) Glyn, Andrew (i), (ii) God, as clockmaker (i) Godwin, William (i) An Enquiry Concerning Political Justice and Its Influence on General Virtue and Happiness (i) gold flows (i) Gold Standard (i), (ii), (iii), (iv), (v) Bretton Woods system (i) leadership of (i) return to (i), (ii), (iii) suspension (i), (ii), (iii) UK exit (i), (ii) Goldberger, Arthur (i) goodness of fit (i) goods, production and supply (i) Goodwin, Richard (i) Goodwin cycle (i) rabbits and foxes game (i) government debt, grading (i) government spending attitudes to (i) benefit (i) post-World War I (i) governments influence over behavior (i) interference and corruption (i) role of (i) Grapes of Wrath, The (John Steinbeck) (i) Great Depression (i), (ii), (iii) monetary policy (i) reactions of economists (i) role of Keynesian model in recovery (i) Great Moderation (i), (ii), (iii), (iv), (v) Great Recession banks (i) as economic crisis or crisis of economics (i) effects of (i) events of (i) failure to anticipate (i) overview (i) prospect of recovery (i) responses to (i), (ii) Great War see World War I Greece, Great Recession (i) Greenspan, Alan (i), (ii), (iii), (iv) The Age of Turbulence (i) gross domestic product (GDP) (i) growth poles, proliferation (i) Hamilton, Alexander (i) Hansen, Alvin (i), (ii) Hansen, Lars Peter (i) Harris, Seymour (i) Harrod, Roy (i) Harvey, William (i) Hatry, Clarence (i) Hayek, Friedrich (i), (ii), (iii) development from Wicksell (i) return to favor (i) heterodoxies (i) heterogeneity, of total output (i) Hicks, John (i) high yields (i) home ownership (i) house prices (i), (ii) household debt, rise in (i) houses as appreciating assets (i) depreciation (i) Hume, David (i), (ii) A Treatise on Human Nature (i) hydraulic analogue model (i) hyperinflation, Germany (i) ideological capture (i) ideological pressure (i) immigrants, scapegoating of (i) imperfect competition (i) theory of (i) imperialism (i) income (i) growth: Harrod’s theory (i); long boom (i) inequality (i) levels (i); influence of money supply (i); new classical model (i); per capita (i) incomes policies (i) indentured labor (i) India (i) individual volition, within overall pattern (i) Industrial Revolution (i), (ii) industrial unrest (i) industrialization effects of (i) less-developed countries (i) industry, working conditions (i) inequality income and wealth (i) long-run trends (i) inflation determining factors (i) eighteenth century (i) house prices (i) Hume’s theory (i) Keynesian models (i) Locke’s theory (i) and manufacturing supply (i) as permanent (i) post-World War I (i) and price rises (i) as priority (i) Smith’s theory (i) as target of public policy (i) and unemployment (i) inflation rates, developed countries (i) information, as public (i) infrastructure development (i) initiative, opportunities for (i) injecting liquidity (i), (ii), (iii) see also quantitative easing innovations clusters (i), (ii), (iii) need for (i) role in boom and bust (i) Institute for Konjunktur (i) interconnectedness (i), (ii) interdependence (i), (ii), (iii) interest attitudes to (i) long-/short-run rates (i) market rate vs natural rate (i) vs profit (i) regulation (i) interest rates effect on recovery (i) global effects (i) Keynes’ view (i) rise in (i) setting (i) US (i) interference and corruption (i) interlinking, developed and emerging economies (i) international economics, interdependence (i) International Gold Standard (i) International Monetary Fund (IMF) purpose (i) warnings of crisis (i) international trade (i), (ii), (iii) invention, and globalization (i) investment and aggregate effective demand (i) and bank credit (i) in business (i) expectations (i) as future-oriented (i) high yields (i) theory of (Keynes) (i) invisible hand (i), (ii), (iii), (iv) involuntary unemployment (i) iron law of wages (Ricardo) (i), (ii) irrational exuberance (i), (ii) IS-LM model (i), (ii), (iii) Is the Business Cycle Obsolete? (ed Martin Bronfenbrenner) (i) Jackson, Andrew (i) Jevons, W Stanley (i) Johnson, Lyndon B (i) Juglar, Clément (i) Kahn, Richard (i) Kennedy, John F (i), (ii) Keynes, John Maynard (i), (ii), (iii), (iv), (v), (vi), (vii) approach and argument (i) at Bretton woods (i) challenge to Ricardo’s theory (i) circus (i) The Economic Consequences of the Peace (i) economic vocabulary (i), (ii), (iii) The General Theory of Employment, Interest and Money (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x) intentions (i) on interest rates (i) liquidity preference (i) The Means to Prosperity (i) monetary theory (i) personality (i) theory of investment (i) A Tract on Monetary Reform (i) The Treatise on Money (i) on trade cycles (i) wheat (i) Keynesian models (i) argument (i) Cross diagram (i) challenges to (i) and cyclical behavior (i) development of (i) in different national contexts (i) equilibrium (i) evaluation of (i) Friedman’s challenge (i), (ii) full employment (i) highpoint (i) inapplicability (i) inflation (i) loss of faith in (i) loss of ground (i) policy legacy (i) in practice (i) public debt (i) recession (i) reduction of (i) rejectionist responses (i) renewed attack on (i) scope of influence (i) stagflation (i) stock disequilibrium (i) Keynesianism effect of policies (i) responses to Great recession (i) Keynesian Revolution, development of theory (i) King, Gregory (i) King, Mervyn, Lord (i), (ii) kings, borrowing (i) Kitchin, Joseph (i) Klein, Lawrence (i), (ii), (iii), (iv), (v) Economic Fluctuations in the United States, 1921–1941, (i) Klein-type models see econometric modeling knowledge demands (i) Kohl, Helmut (i) Kondratieff cycles (i), (ii), (iii), (iv), (v) Kondratieff, Nikolai Dimitrievich (i) labor, free movement (i) labor theory of value (i) laissez-faire (i), (ii) land values (i) Law of Population (Malthus) (i) laws of motion (i) Lehman Brothers (i), (ii) lender of last resort (i) lending (i), (ii), (iii) Lenin, Vladimir (i) less-developed countries, crises (i) Lesseps, Ferdinand de (i) Lévy, Dominique (i) Liberal Party, social reform (i) liberalization (i), (ii), (iii) limited liability (i) LINK project (i) liquidity injecting (i), (ii), (iii) see also quantitative easing liquidity preference (i), (ii) liquidity trap (i) living standards (i) loans, interest (i) local knowledge (i) Locke, John (i) London, stock market crash (i) long boom (i), (ii), (iii), (iv) long cycles (i) Long Depression (i), (ii) long perspective (i) long-run equilibrium (i) long-run rate of interest (i) long swings (i) Long-Term Capital Management (i), (ii) Louis XVI, execution (i) Lucas, Robert (i), (ii), (iii), (iv) Luddites (i) machinery, effects on relative value (i) MacMillan, Harold (i) macro-modeling (i), (ii) macroeconomic models (i) macroeconomics (i) teaching of (i) mal-investments (i) Malthus, Thomas (i) Essay on Population (i) Law of Population (i) use of statistics (i) Mandel, Ernest (i), (ii) manufacturing, relocation (i), (ii), (iii), (iv) marginal costs (i) marginal disutility of work (i) marginal efficiency of capital (MEC) (i), (ii), (iii) marginal propensity to consume (MPC) (i), (ii), (iii) market economy equilibrium (i) globalization (i) market rate of interest (i) market regulation (i) markets perfect (i) and profit (i) single (i) theory of (Ricardo) (i) Marshall Aid (i) Marshall, Alfred (i), (ii) The Economics of Industry (with Mary Marshall) (i) Marshall, Mary (i) Marshallian Cross (i), (ii) Marshall’s theory of competition (i) Marx, Karl (i), (ii), (iii), (iv) The Communist Menifesto (with Friedrich Engels) (i) Das Kapital (i) Marxian view collapse of capitalism (i) extension of (i) revival of (i) mathematical representation, of economic theory (i) mathematical techniques, misleading (i) mathematics, usefulness (i) McCarthy, Sen Joseph (i) Meade, James (i) mean (i) measurement of capital debate (i) mechanization, of weaving (i) Meiselman, David (i) Menger, Carl (i) mercantilism (i), (ii), (iii) Mexico see crises, Mexican microeconomics (i) Middle East, post-World War I (i) Mill, John Stuart (i) Mitchell, Wesley Clair (i) Mitterand, Franỗois (i) modeling (i), (ii) macro-200 new classical economics (i) see also econometric modeling Modigliani, Franco (i) monetarism (i) control of money supply (i) deficit reduction demands (i) effects of (i) political support (i) monetarists (i) monetary policy Bundesbank (i) role of (i) as tool for recovery (i), (ii) monetary theory (i) money circulation (i) effect on economic system (i) motives for demand (i) role of (i) as scaling variable (i) money balances (i), (ii) money changers (i) money cranks (i) money price level (i) money problem (i) money supply (i), (ii) money wages flexibility/rigidity (i) and inflation (i) rates of increase (i) and unemployment (i), (ii) see also real wages; wages monopolies, grants of (i) monopoly power (i) Moore, Henry (i) mortgages (i), (ii), (iii) securitization (i) subprime (i), (ii) moving data, and unique static equilibrium (i) “Mr Keynes and the ‘Classics’: A Suggested Interpretation” (Hicks) (i) multiplier-accelerator model (i) multiplier process (i), (ii) Friedman’s challenge (i) Myrdal, Gunnar (i), (ii) Monetary Equilibrium (i) national data (i) National Debt (i) natural rate of interest (i) natural rate of unemployment (i) negative equity (i) neoclassical economics (i) neoclassical-Keynesian synthesis (i) new classical economics (i) attitude to modeling (i) modeling (i) time series data (i) new classical macro model (i) new classical model (i) aggregate demand and aggregate supply (i) policy implications (i) new normality (i) Newcomb, Simon (i) newly-industrialized economies (i) Newton, Isaac (i), (ii), (iii) Nixon, Richard (i), (ii), (iii) Nobel Prize (i), (ii), (iii), (iv), (v), (vi) nominal level (i) non-inflationary continuous expansion (NICE) (i), (ii) normal distribution (i) North America, Declaration of Independence (i) Northern Rock (i) oil shock (i) “On the High Price of Bullion’’ (Ricardo) (i) one-to-one jobs (i) O’Neill, Jim (i) open economy (i) opportunity cost (i) optimism/pessimism (i) options (i) Osborne, George (i) Ottoman Empire (i) Overend & Gurney (i) oversaving (i), (ii), (iii), (iv), (v), (vi) Overstone, Lord (i) Paish, Frank (i) paper currency, withdrawal (i) parameters (i) partial equilibrium theory (i), (ii) Paterson, William (i) Pax Britannica (i) per capita incomes (i) perfect markets see under markets Phillips, A W H (i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) Friedman’s challenge (i) Friedman’s version (i) Phillips’ historical study (i) Pigou, Arthur Cecil (i), (ii), (iii) equation (i) “The Classical Stationary State” (i) Piketty, Thomas (i), (ii) Pitt, William (younger) (i) point of maximum efficiency (i) policy, responses to (i) politics, effect of economic change (i) population aging (i), (ii) growth (i), (ii), (iii), (iv) Malthus’ law (i) portfolio selection (i) Post-Keynesians (i) postwar economic order, planning for (i) poverty, urban (i) precautionary motive (i) precious metals acquisition of (i) as indicators of wealth (i) predictive modeling (i), (ii) preemptive tax cut (i) preference shocks (i) price, as value (i) price levels, new classical model (i) price rises 1492 to 1589 (i) and inflation (i) post-World War I (i) vs value (i) price takers, vs price setters (i) price volatility, Smith’s theory (i) prices agricultural (i) determination (i) empirical analysis of asset prices (i) and productivity (i) sticky (i) Prices and Production (Hayek) (i) pricing, monopoly power (i) Prince, Chuck (i) Principle of Motion (i) Principles of Economics (Marshall) (i) private spending, control of (i) privatization (i) problems, concealment by accounting (i) productivity and price of goods (i) and prosperity (i) professionalization, of economics (i) profit (i) dependence on market (i) effects of progress (i) vs interest (i) maximization (i) realization of (i) as unearned income (i) profit rates, and unrestricted movement of capital (i) profit squeeze (i) profitability (i) progress, effects on profit (i) Progressive Movement, United States (i) prospect of recovery (i) prosperity (i), (ii), (iii) protectionism (i), (ii) public debt (i) as intergenerational (i) Keynesian models (i) public policy, inflation targeting (i) purchasing power parity (PPP) theory (i) quantitative easing (i) see also liquidity injecting quantity theory of money (i), (ii), (iii) railroads (i), (ii) Rajan, Raghuram (i), (ii) random events (i), (ii), (iii) rate of profit, and unrestricted movement of capital (i) rates of return, ex ante/ex post calculations (i) rational expectations (RE) (i), (ii), (iii) ready cash (i) Reagan, Ronald (i) real balance effect (i) real interest parity (i) real wages (i), (ii), (iii), (iv), (v), (vi), (vii) see also money wages; wages recapitalization, banks (i) reconstruction (i), (ii) recovery, prospect of (i) redistribution (i) regulation of banks (i) financial and commodity markets (i) UK approach (i) Reinhardt, Carmen M (i) “This Time is Different” (with Kenneth Rogoff) (i) relative value (i) Ricardo (i) religion, prohibition of usury (i) religious beliefs (i) rentier class (i) rents, as unearned income (i), (ii) research tradition, constraints of (i) reserve currency (i), (ii) residual (i) resource exploitation, effects of (i) resources, reactivation (i) restricted capital movements (i) retrenchment, post-World War I (i) return, and risk (i) Ricardian Equivalence (i), (ii) Ricardian theory, failure of (i) Ricardo, Abraham Israel (i) Ricardo, David (i) character and biography (i) context of writings (i) free trade (i) iron law of wages (i), (ii) pessimism (i) on population growth (i) on profit (i) relative value (i) on rents (i) significance of work (i), (ii) theory of depreciation (i) theory of equilibrium (i), (ii), (iii) theory of the markets (i) trade doctrine (i) right of revolt (i) right-wing politics (i), (ii) risk (i) management and pricing (i) perpetuation (i) and return (i) spreading (i) Roaring Twenties (i) Robinson, Joan (i) rocking horse analogy (i), (ii) Rogoff, Kenneth S (i) “This Time is Different” (with Carmen Reinhardt) (i) Roosevelt, Franklin D (i), (ii) Rothschilds (i) Roubini, Nouriel (i) Royal Charter, grants of monopoly (i) rules of competition (i) Russia (i), (ii) Russian revolution (i), (ii) saltwater economists (i), (ii) Samuelson, Paul (i), (ii), (iii), (iv) “Analytical Aspects of an Anti–Inflation Policy” (with Robert Solow) (i) Say, Jean-Baptiste (i) Say’s Law (i), (ii) scarcity value (i) Scholes, Myron (i), (ii), (iii) Schumpeter, Joseph (i), (ii), (iii), (iv) The Theory of Economic Development (i) Schwartz, Anna, A Monetary History of the United States (with Milton Friedman) (i) Scottish Enlightenment (i) Second International (i) secular stagnation (i) securitization of mortgages (i) seigniorage privilege (i) self-interest (i) self-organizing society (i) self-sufficiency (i) service sector (i), (ii) servomechanism (i) shadow banking structure (i) shares (i) Sherman Act (i) Shiller, Robert (i), (ii) shocks (i), (ii), (iii) contagion (i) debt crises (i) political (i) see also oil shock short cycles (i) short-run rate of interest (i) Silesian weavers (i) single global currency (i) skills, types needed (i), (ii) slack (i) slavery, abolition of (i) Slutsky, Eugen (i), (ii), (iii) Smith, Adam (i), (ii), (iii), (iv), (v) the founding of the political economy (i) An Inquiry into the Nature and Causes of the Wealth of Nations (i), (ii) The Theory of Moral Sentiments (i), (ii) social science, founding (i) Socialist International (i) society regulation (i) self-organizing (i) Solow, Robert (i), (ii), (iii) “Analytical Aspects of an Anti–Inflation Policy” (with Paul Samuelson) (i) sovereign debt crises (i), (ii) Soviet Union, break up (i), (ii) speculation (i) speculative motive (i), (ii) stag-deflation (i) stagflation (i), (ii), (iii) Stalin, Joseph (i) static vision (i) statistics (i) development of (i) historical research (i) usefulness (i) sterling, as reserve currency (i) stochastic calculus (i) stock market crash, London (i) stock markets bull run (i) competition (i) computer technology (i) stock prices, randomness (i) Stockholm School (i) Stop-Go cycle (i) policy (i) Summers, Larry (i) surplus value (i) sustainable recovery, sources of (i) Sutcliffe, Robert (i), (ii) sweetwater economists (i), (ii) Sweezy, Paul (i) System of Natural Liberty (i) T bills (i), (ii), (iii) tatonnement (i) tax cut, US (i) technical progress, role of (i) technological innovations author’s experiences (i) displacement effect (i), (ii) and manufacturing location (i) see also computer technology technological shocks (i) telecommunications (i) Thailand, Crisis, 1997 (i) Thatcher, Margaret (i) theories, need for validation (i) theory of economic behavior of the household (i) Thornton, Henry (i) time, role of (i) time series data (i) Tinbergen, Jan (i) Tobin, James (i) Tobin tax (i) total money supply, and prices (i) total output, heterogeneity (i) trade doctrine see under Ricardo trade-off, unemployment and inflation (i) trade surpluses, banking (i) trade unions effect on money wage (i) as harmful (i) power (i) rise of (i) strengthening (i) weakening (i) transactions motive (i) transmission mechanism (i) Troubled Assets Recovery Program (TARP) (i) true costs of production (i) Truman, Harry (i) trusts (i) Tugan-Baranowsky, Michael (i) Turkey (i) Turner, Adair, Lord (i) Two Treatises on Government (Locke) (i) uncertainty (i) underemployment equilibrium (i), (ii), (iii) undersaving (i), (ii) unearned income (i) unemployment aggregate level (i) cycles (i) effect of wages (i) explaining (i) and inflation (i) involuntary (i) and money wage (i) natural rate (i) see also Keynesian models unifying principle (i) unique static equilibrium, and moving data (i) unit labor costs (i) United Kingdom budget deficit elimination (i) deindustrialization (i) economic trajectory (i) Great Depression (i) monetarism (i) recovery strategy (i) see also Britain United Nations Industrial Development Organization (UNIDO) (i) United States budget deficit (i) deindustrialization (i) econometric modeling (i) economic trajectory (i) economic weakness, post WWI (i) fiscal boost (i) Gold Standard (i) Great Depression (i) interest rates (i) Keynesianism (i) post-World War I power (i) post-World War II (i) Progressive Movement (i) prosperity (i) recovery strategy (i) seigniorage privilege (i) tax cut (i) trade deficit (i) welfare state expansion (i) westward expansion (i) withdrawal of currency (i) see also America unorthodoxy (i) urbanization (i) US House of Representatives, Greenspan’s testimony (i) usury defining (i) laws (i) prohibition (i), (ii) utopianism (i), (ii) valuation of assets, theory of (i) of capital (i) value vs.price (i) as price (i) relative (i), (ii) value added (i) value of goods, determination (i) variable costs (i) variables (i) Vietnam War (i) visions of economy (i) vocabulary, economic (i), (ii), (iii) volition (i) wage agreements, voluntary (i) demands, post-World War I (i) downward trend (i) effect on unemployment (i) rates, and unemployment (i) restraint (i) rises (i) share: declining (i); developed and developing economies (i); rise in (i), (ii) wage/profit distinction (i) units (i), (ii) see also money wages; real wages Walras, Antoine Auguste (i) Walras, Léon (i), (ii) Walrasian model (i) wars, financing (i) wealth distribution (i) inequality of (i) indicators (i) Smith’s theory (i) weaving, mechanization (i) welfare economics (i) welfare state, levels of support (i) White, Harry (i) Wicksell, Knut (i), (ii) basis of Hayek’s theory (i) later development of ideas (i) Wicksellian boom, developing countries (i) Wicksellian cycle, combined with Kondratieff cycle (i) William III (i) women, in workforce (i) workers dependence on capitalists (i) living standards (i) migration (i) productive/unproductive (i) workforce, recruitment of women (i) World Trade Organization (WTO) (i), (ii) World War I (i) World War II, outbreak (i) yields (i) Zombie firms (i) ... of economic history? To find the answers we have to understand why economists think the way they and how this thinking resulted in the failure to predict the coming crisis We need to distinguish... economics: why economists failed to predict the crisis, what happened, why it happened when it did, and why economists won’t admit that they were wrong I also want to address the criticisms of the overuse... nation and not the treasures of gold and silver it had accumulated The productivity of the workers could be enhanced with tools and machines The capital – the money to buy the tools and machinery