New Directions in Modern Economics series
Chapter 14: Lessons
QUESTIONS In the post-war period, it was fashionable to claim that the business cycle was obsolete. Furthermore, the so-called ‘Great Moderation’ age has spread the conviction that monetary authority can deal under any circumstance with the shocks that sometimes hit the economy. In this environment, the analytical questions were also tailored in keeping with the tranquil state of the economy. The recent turmoil that has hit the economy seems to point in an opposite direction. Business cycles and fluctuations regain the stage, economic policy measures take a broader view, while the analytical emphasis also changes, by revitalizing those questions that were at the center of the analysis in the 1930s: 1. 2. Is the role of aggregate demand important not only for the economy as a whole, but also for the labor market in particular? Is the system capable of returning to full employment in an endogenous way? These questions represent the core of the present book. We have tried to frame them in dynamic language which is more appropriate for understanding the stylized facts that characterize the evolution of the economy; this was not available at the time of the ‘Great Depression’. History hardly repeats itself. However, it is legitimate to ask: ‘Can “it” happen again?’ This is the title of Minsky’s (1982) famous book that put ‘it’ (the Great Depression) at center stage and it is also a question behind the present analysis. The current economic situation has three characteristics that make it different from any other...