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Unformatted text preview: >> The Making of Modern Macroeconomics Section 2: The Great Depression and the Keynesian Revolution chapter 17 The Great Depression demonstrated, once and for all, that economists cannot safely ignore the short run. Not only was the economic pain severe; it threatened to desta- bilize societies and political systems. In particular, the economic plunge helped Adolf Hitler rise to power in Germany. The whole world wanted to know how this economic disaster could be happening and what should be done about it. But because there was no widely accepted theory of the business cycle, economists gave conflicting and, we now believe, often harm- ful advice. Some believed that only a huge change in the economic system—such as having the government take over much of private industry and replace markets with central planning—could end the slump. Others argued that slumps were natural— even beneficial—and that nothing should be done. Some economists, however, argued that the slump both could and should be cured—without giving up on the basic idea of a market economy. In 1930 the British 2 C H A P T E R 1 7 S E C T I O N 2 : THE GREAT DEPRESSION AND THE KEYNESIAN REVOLUTION economist John Maynard Keynes compared the problems of the U.S. and British economies to those of a car with a defective alternator. Getting the economy running, he argued, would require only a modest repair, not a complete overhaul. Nice metaphor. But what was the nature of the trouble? Keynes’s Theory In 1936 Keynes presented his analysis of the Great Depression—his explanation of what was wrong with the economy’s alternator—in a book titled The General Theory of Employment, Interest, and Money. In 1946 the great American economist Paul Samuelson wrote that “it is a badly written book, poorly organized. . . . Flashes of insight and intuition intersperse tedious algebra . . . We find its analysis to be obvi- ous and at the same time new. In short, it is a work of genius.” The General Theory isn’t easy reading, but it stands with Adam Smith’s The Wealth of Nations as one of the most influential books on economics ever written.the most influential books on economics ever written....
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.
- Spring '08