Cyclical models of history often draw a cpnnection between the remoteness of an event in the living memory of the current population and the greater likelihood of something like that event recurring. Something like that appears to be at work in Paul Krugman's The Return of Depression Economics and the Crisis of 2008, material for Book Review No 46. Professor Krugman begins with a summary of macroeconomic hubris ("between John Maynard Keynes and Milton Friedman, we thought we knew enough to keep [stagnation and deflation] from happening again," p. 4; "The Central Problem Has Been Solved," chap. 1) and the collapse of Communism, taking the principal intellectual challenge to market-system economics in theory and practice with it. He then notes that early in the 1990s, ominous signs, not unlike those present in the 1920s and oh-so-visible with hindsight, appeared in the economies of developing countries and diffused to more developed countries and particularly their financial sectors. Professor Krugman does not make his case in detail, although he covers some of the same ground Michael Lewis's Panic, reviewed here, and Liaquat Ahamed's Lords of Finance: The Bankers who Broke the World, reviewed here, is a useful companion piece on events leading to the Great Depression. And thus we are contemplating the end of the Oh-Ohs, and Professor Krugman's concluding observation invokes that cycle.
What makes this year's collection of Book Reviews intellectually intriguing is that other books contemplating The Latest Bubble to Pop, or Depression 2.0 would treat the Keynesian doctrines as obsolete.
Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. The true scarcity in Keynes's world -- and ours -- was therefore not of of resources, or even of virtue, but of understanding.
We will not achieve the understanding we need, however, unless we are willing to think clearly about our problems and to follow hose thoughts wherever they lead. Some people say that our economic problems are structural, with no quick cure available; but I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.
(Cross-posted to Cold Spring Shops.)