A little bit I plan to include in the chapter on the Great Moderation, linking on to a critique of post-70s macroeconomics. As always, comments and criticism gratefully (and, mostly, I hope, gracefully) accepted
The failure of the Great Moderation calls for a rethinking of the macroeconomic experience of the 20th century, and, in particular, the crisis of the 1970s. Considered as a whole, the performance of developed economics in the era of market liberalism looks considerably less impressive than that of the postwar period of Keynesian social democracy.
Yet the Keynesian era ended in the chaos and failure of the 1970s. Until the current crisis, that failure was widely taken as conclusive. Whatever its merits, it seemed, Keynesian economic management had proved unsustainable in the end, while the methods of market liberalism seemed to promise the continuing stability of the Great Moderation.
That view can no longer be sustained. The Great Moderation has ended in a failure at least as bad as that of the postwar boom. And, if there is a recovery, it will be due to the very measures that market liberalism was supposed to have rendered obsolete. How then, should we think about the Keynesian era and its failure?
One possible interpretation, a pessimistic one, is that business cycles are so deeply embedded in the logic of market economics (and, perhaps of all modern economies) that they cannot be tamed. Success breeds hubris, and hubris leads us to ignore the lessons of the past: that resources are always constrained, that budgets must ultimately balance, that wages and other incomes cannot, for long, exceed the value of production and so on. It the 1960s, this hubris manifested itself in the wage-price spiral. In the 1990s and 2000s, it was seen in the speculative frenzy unleashed by the self-styled Masters of the Universe in the financial sector.
But this is not the only possible interpretation. Perhaps the failures of the 1970s were the result of mistakes that could have been avoided with a better understanding of the economy and stronger social institutions. If so, the current crisis may mark a return to successful Keynesian policies that take account of the errors of the past.
The end of the Great Moderation has forced policymakers to relearn the basic lessons of Keynesian economics. Economies can collapse to a point where only large scale monetary expansion and fiscal stimulus can revive them. But having revived the economy, can Keynesian policies restore and sustain full employment in a system that is inherently prone to crisis. To answer this question, we requires radical new directions in macronomics. As we will argue in the following chapter, that means the abandonment of yet more dead or obsolete ideas.