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 economicthinkersthathavecontributedtotheevolutionoftheeconomicdiscipline. Springer Studies in the History of Economic Thought (SSHET) welcomes proposals for research monographs, edited volumes and handbooks from a variety ofdisciplinesthatseektostudythehistoryofeconomicthinkingandhelptoarrive atabetterunderstandingofmoderneconomics.Relevanttopicsinclude,butarenot limitedto,variousschoolsofthought,importantpioneersandthinkers,ancientand medieval economic thought, mercantilism, cameralism and physiocracy, classical and neoclassical economics, historical, institutional and evolutionary economics, socialismandMarxism,Keynesian,SraffianandAustrianeconomics,econometrics and mathematical studies as well as economic methodology and the link between economichistoryandhistoryofeconomicthought. Alltitlesinthisseriesarepeer-reviewed. For further information on the series and to submit a proposal for consideration, please contact Johannes Glaeser (Senior Editor Economics) Johannes.glaeser@ springer.com. Moreinformationaboutthisseriesathttps://link.springer.com/bookseries/16457 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 ©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNature SwitzerlandAG2022 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuse ofillustrations,recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,and transmissionorinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilar ordissimilarmethodologynowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthisbook arebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressedorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland 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