Search results

This chapter investigates the nature of the transformation of macroeconomics by focusing on the impact of the Great Depression on economic doctrines. There is no doubt that the Great Depression exerted an enormous influence on economic thought, but the exact nature of its impact should be examined more carefully. In this chapter, I examine the transformation from a perspective which emphasizes the interaction between economic ideas and economic events, and the interaction between theory and policy rather than the development of economic theory. More specifically, I examine the evolution of what became known as macroeconomics after the Depression in terms of an ongoing debate among the “stabilizers” and their critics. I further suggest using four perspectives, or schools of thought, as measures to locate the evolution and transformation; the gold standard mentality, liquidationism, the Treasury view, and the real-bills doctrine. By highlighting these four economic ideas, I argue that what happened during the Great Depression was the retreat of the gold standard mentality, the complete demise of liquidationism and the Treasury view, and the strange survival of the real-bills doctrine. Each of those transformations happened not in response to internal debates in the discipline, but in response to government policies and real-world events.

Offers a response to David Laidler’s article “More on Hawtrey, Harvard and Chicago”, in this issue. Asserts that the unique Chicagoan quantity‐theory of the early 1930s embodied a policy framework which left it immune from the Keynesian revolution and contained important linkages with Friedman’s views in its business‐cycle analysis and policy positions. Claims that this tradition explains why Chicago (and not Harvard) originated the monetarist counter‐revolution.

Responds to George Tavlas’ comments in “More on the Chicago tradition”, in this issue, and once again assesses the contribution of individuals to “the Chicago tradition” of the 1930s.

The similarities among the writings of Ralph Hawtrey, Lauchlin Currie and Milton Friedman are re‐affirmed, as is the influence of the former on what Friedman has called “the Chicago tradition” of the 1930s. The underconsumptionist analysis of Paul Douglas is not integral to that tradition.

Adam Smith’s theory of economic growth, as presented in the Wealth of Nations, is based upon the potential for increasing returns in manufacturing generated by increased specialization and division of labour and upon the accumulation of real capital, which is necessary to support the greater division of labour. The increasing returns part of Smith’s theory leaves open the possibility that bank credit, issued judiciously, might be used to extend the market and so increase an economy’s growth rate. However, Smith’s theory of bank credit and note extension is quite conservative. Henry Dunning Macleod, a century after Smith, made much of the potential of credit to extend the market. Notes Smith’s apparent inconsistency and considers reasons why he might have chosen not to promote the use of credit to enhance economic growth.

An interview with Milton Friedman in 1996 ‐ presents his reflections on some of the important issues surrounding the evolution of, and currrent debates within, modern macroeconomics. A world‐renowned economist and prolific author since the 1930s, Milton Friedman has had a considerable impact on macroeconomic theory and policy making. Associated mostly with monetarism and the efficacy of free markets, his work has ranged over a broader area ‐ microeconomics, methodology, consumption function, applied statistics, international economics, monetary theory, history and policy, business cycles and inflation. In the interview discusses Keynes’s General Theory, monetarism, new classical macroeconomics, methodology, economic policy, European union and the monetarist counter‐revolution.

How well does the “Law of One Price” operate across countries? Interest in this question has been stimulated by the Monetary Aproach to the Balance of Payments (Frenkel and Johnson (1975)) which uses the law to determine the price of traded goods in open economies.