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the_return_of_depression_economics [2010/07/06 13:34]
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the_return_of_depression_economics [2010/07/06 13:00] (current)
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 **//​[[wp>​The Return of Depression Economics]]//​ by [[wp>​Paul Krugman]], 1999.  London: Penguin** **//​[[wp>​The Return of Depression Economics]]//​ by [[wp>​Paul Krugman]], 1999.  London: Penguin**
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 ====== July 1, 1997 ====== ====== July 1, 1997 ======
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 By July 1997, twenty years of events had placed capitalism in a uniquely triumphant position in its history: starting with Chinese reforms in 1978, feeding off the Soviet collapse and buoyed by the seeming triumph of the emerging SE Asian economies. ​ Self-congratulation at the flawless management of capitalist economies had returned --- just as on the eve of 1970s stagflation,​ economic journals were asking, 'Is the business cycle obsolete?'​ so too, in 1997, Foreign Affairs published an article titled 'The end of the business cycle?'​ By July 1997, twenty years of events had placed capitalism in a uniquely triumphant position in its history: starting with Chinese reforms in 1978, feeding off the Soviet collapse and buoyed by the seeming triumph of the emerging SE Asian economies. ​ Self-congratulation at the flawless management of capitalist economies had returned --- just as on the eve of 1970s stagflation,​ economic journals were asking, 'Is the business cycle obsolete?'​ so too, in 1997, Foreign Affairs published an article titled 'The end of the business cycle?'​
  
-Premature, perhaps, but it is important to have a working model of why depressions happen. ​ Krugman uses the Sweeneys'​ baby-sitting cooperative as his starting point, modelling a depression as a failure of demand, perhaps caused by a scarcity of money. ​ The most important conclusion to be drawn from this model is: bad things happen to good economies --- no inherent weakness in the baby-sitting economy lead to its failure of demand, and so it is not advisable to assert that simply because an economy is in good, robust shape, that it is now immune from depressions.+Premature, perhaps, but it is important to have a working model of why depressions happen. ​ Krugman uses the Sweeneys'​ baby-sitting cooperative as his starting point, modelling a depression as a failure of demand, perhaps caused by a scarcity of money. ​ The most important conclusion to be drawn from this model is: //bad things happen to good economies// --- no inherent weakness in the baby-sitting economy lead to its failure of demand, and so it is not advisable to assert that simply because an economy is in good, robust shape, that it is now immune from depressions.
  
 Before World War II the role of demand management simply was not understood; from the War to the end of the sixties, the principles of Keynesian demand management seemed to be successfully adopted. In the 1970s Vietnam and the oil shocks proved that not all economic circumstances were easily manageable but by the 1980s it seemed that for the most part such management --- even if only through monetary mechanisms --- was proving successful. ​ In 1987 the stock market crashed, losing as much value in the crash'​s first day as was lost in the first day of 1929 --- but the Fed responded quickly, pumping cash into the system and there was very little impact on the real economy. ​ By 1997, then, it did appear that even if the business cycle was not eliminated it might at least have been decisively tamed. Before World War II the role of demand management simply was not understood; from the War to the end of the sixties, the principles of Keynesian demand management seemed to be successfully adopted. In the 1970s Vietnam and the oil shocks proved that not all economic circumstances were easily manageable but by the 1980s it seemed that for the most part such management --- even if only through monetary mechanisms --- was proving successful. ​ In 1987 the stock market crashed, losing as much value in the crash'​s first day as was lost in the first day of 1929 --- but the Fed responded quickly, pumping cash into the system and there was very little impact on the real economy. ​ By 1997, then, it did appear that even if the business cycle was not eliminated it might at least have been decisively tamed.
  
-The advent of information technology was clearly having an impact on at least the perception of capitalism, even if the real value for the economy was being overrated --- for the first time in a generation, certain markets were being dominated by intrepid entrepreneurs rather than staid corporations,​ and the IT revolution had an enormously visible impact on the environment in which most in the West worked: the landscape of the typical office. ​ And the first beneficiaries of globalisation --- the SE Asian economies --- were now reaping enough unquestionable success to provide ample ammunition to those who argued that a globalised, export-led development path was the decisive means to escape poverty. ​ There were problems: Japan had still not recovered from a recession that had begun in the early nineties, Europe was finding it difficult to force unemployment down as far as it would like, particularly amongst its young and even during recoveries, critics of capitalism pointed to those remaining in extreme poverty in the US and the working conditions of the poorest industrial workers in the developing economies --- and the vast swathes in Africa and South Asia who were still untouched by this new growth.+The advent of information technology was clearly having an impact on at least the //perception// of capitalism, even if the real value for the economy was being overrated --- for the first time in a generation, certain markets were being dominated by intrepid entrepreneurs rather than staid corporations,​ and the IT revolution had an enormously visible impact on the environment in which most in the West worked: the landscape of the typical office. ​ And the first beneficiaries of globalisation --- the SE Asian economies --- were now reaping enough unquestionable success to provide ample ammunition to those who argued that a globalised, export-led development path was the decisive means to escape poverty. ​ There were problems: Japan had still not recovered from a recession that had begun in the early nineties, Europe was finding it difficult to force unemployment down as far as it would like, particularly amongst its young and even during recoveries, critics of capitalism pointed to those remaining in extreme poverty in the US and the working conditions of the poorest industrial workers in the developing economies --- and the vast swathes in Africa and South Asia who were still untouched by this new growth.
  
 > But the prospects for the world economy in general, and for capitalism in particular, seemed better than they had been in living memory, better than anyone could have imagined a decade or two earlier. > But the prospects for the world economy in general, and for capitalism in particular, seemed better than they had been in living memory, better than anyone could have imagined a decade or two earlier.
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 These were the wrong lessons. ​ It was not appreciated that the errors in Mexican policy-making,​ although real, were out of all proportion to the scale of the crisis --- it seemed like an exceptionally severe punishment for such misdemeanours. ​ Moreover, the rescue had been achieved primarily by a sleight of hand by the Treasury over Congress'​ disapproval --- hardly an indication that a robust international system was working. ​ And in the Mexican case the political relationship was easily managed --- the US was particularly anxious to assist an economy which is too close to its borders to be allowed to fail, and Mexican politicians were not above asking for help from Washington and accepting a little policy direction. ​ Perhaps above all, there was a failure to understand just how lucky the rescue package had been in the effect that it had had --- in truth there was little genuine reason to believe that intelligent policy intervention had been a more decisive factor than dumb luck in getting things back on track. These were the wrong lessons. ​ It was not appreciated that the errors in Mexican policy-making,​ although real, were out of all proportion to the scale of the crisis --- it seemed like an exceptionally severe punishment for such misdemeanours. ​ Moreover, the rescue had been achieved primarily by a sleight of hand by the Treasury over Congress'​ disapproval --- hardly an indication that a robust international system was working. ​ And in the Mexican case the political relationship was easily managed --- the US was particularly anxious to assist an economy which is too close to its borders to be allowed to fail, and Mexican politicians were not above asking for help from Washington and accepting a little policy direction. ​ Perhaps above all, there was a failure to understand just how lucky the rescue package had been in the effect that it had had --- in truth there was little genuine reason to believe that intelligent policy intervention had been a more decisive factor than dumb luck in getting things back on track.
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 ====== The Future That Didn't Work: Japan in the 1990s ====== ====== The Future That Didn't Work: Japan in the 1990s ======
  
-Japan'​s economy was very successful in the period 1953-73, growing at around 9 per cent per annum, the most rapid sustained industrial growth that had then been recorded, even faster than the early years of Stalinism. ​ This success didn't really gain attention from the West until it was already decaying; from 1973 onwards growth slowed suddenly --- at the same time as it did throughout much of the world --- to around 4 per cent.  Although debate on Japan'​s success was not particularly timely, it was extensive. ​ Opinion divided into two main camps:+Japan'​s economy was very successful in the period 1953--73, growing at around 9 per cent per annum, the most rapid sustained industrial growth that had then been recorded, even faster than the early years of Stalinism. ​ This success didn't really gain attention from the West until it was already decaying; from 1973 onwards growth slowed suddenly --- at the same time as it did throughout much of the world --- to around 4 per cent.  Although debate on Japan'​s success was not particularly timely, it was extensive. ​ Opinion divided into two main camps:
  
   - Those who believed that Japan'​s successes could be explained by classical economic theory --- that what had happened essentially boiled down to '​getting economic fundamentals right',​ and   - Those who believed that Japan'​s successes could be explained by classical economic theory --- that what had happened essentially boiled down to '​getting economic fundamentals right',​ and
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