The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 10: The Role of the History of Economic Thought in the Development of Economic Theory and Policy

Steven Kates

Subjects: economics and finance, financial economics and regulation, history of economic thought

Extract

Steven Kates Since the onset of the Global Financial Crisis (GFC), the question that has been before the economics community of the world has been, first, how to explain what brought on deep recession during the latter months of 2008 and the first few months of 2009, and then, more importantly given the nature of these problems, how to reduce the impact of the recession and return our economies as quickly as we possibly can to rapid rates of noninflationary growth and acceptable levels of unemployment. There is, as it happens, a textbook answer to the second question and in many ways it is also the answer to the first. The answer to the second question, so far as policy is concerned, is to stimulate aggregate demand through a vast public expenditure programme. As to the first, explaining why it has happened revolves around explaining why there had been a fall in aggregate demand across the world. It is this fall in demand that is seen to have lowered economic growth and caused unemployment rates to rise. The analysis and policy response come from the bedrock Keynesian model found in virtually every macroeconomics text in the world. They come in a number of different forms, but no economist is unfamiliar with the C+I+G Keynesian-cross-approach, IS-LM curves, or models built around aggregate demand-aggregate supply. All of these were first constructed to illustrate Keynes’s argument that recessions are a result of too little demand and to show how an increase in public...

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