Chapter 2: Responding to economic crisis: macroeconomic revolutions in the 1930s and 1970s
The twentieth century saw two major revolutions in macroeconomic theory, each of which can be associated with a worldwide economic crisis. The Great Depression of the 1930s gave rise to the Keynesian revolution, laying the foundations for the approach to economic theorizing and policymaking that dominated what a French journalist, Jean Fourastié, called ‘les trentes glorieuses’ – the three decades of unparalleled prosperity, at least in North America and western Europe, following the Second World War. This ‘age of Keynes’ was followed by another revolution, for which there exists no widely agreed name. The most concise label is the Friedman–Lucas revolution, after Milton Friedman and Robert Lucas, whose analysis of policymaking was central to turning the Keynesian orthodoxy about demand management on its head. The Friedman–Lucas revolution did not cause Keynesianism to disappear, as had pre-Keynesian economics after the Keynesian revolution, but the ‘new Keynesians’, who emerged as the most prominent challengers to the new orthodoxy, were on the defensive. Ongoing debates between the new Keynesians and their new classical or real-business-cycle counterparts laid the foundations for what Goodfriend and King (1997) called the ‘new neoclassical synthesis’, summed up in Michael Woodford’s Interest and Prices (2003). It was this second revolution, sometimes called a ‘counter-revolution’, on account of its restoration of a classical orthodoxy, that was called into question by the financial crisis of 2008.
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