Thursday, February 25, 2010


It seems pretty clear by now that we are experiencing the worst economic upheaval in global terms since the Great Depression of the 1930's. Indeed I would submit that our present problems are of a more fundamental nature that will require a major change with respect to current economic thinking before they can be solved.

It can perhaps help to provide some perspective on the present situation by briefly reviewing the nature of the changes brought about by the last crisis.

Though it is simplifying somewhat, before the Great Depression, the philosophy of free markets without intervention still held sway. The Government though still necessarily involved in the economy, played a largely passsive role attempting to balance the books with respect to its own incomes and expenditure.

Though the business cycle was well recognised as a regular occurring phenomenon, it was viewed somewhat like weather conditions. Thus when things were especially bad one simply waited for market conditions to eventually improve.

However the Great Depression - which was particularly severe and long protracted - somewhat inevitably led to new thinking with John Maynard Keynes especially questioning the prevailing consensus. One way of expressing this is with reference to the fallacy of composition.

Free market economics is firmly based on the primacy of the individual micro element (with respect to consumption, production and markets). This then led to a somewhat reduced notion of the overall macro economy as simply the aggregate of such micro elements.

However the phenomenon of the Business Cycle - which was a very regular occurence with respect to developed economies - indicated that key assumption on which free markets were based did not actually operate in practice (certainly within a short time frame).

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