The return of depression economics
Title: The Return of Depression Economics and the Crisis of 2008
Author: Paul Krugman
Publisher: W.W. Norton, 2008
ISBN-13: 978-0393071016, 224 pages
Review: The Return of Depression Economics and the Crisis of 2008
By Patrick Brigger, getAbstract
Nobel Laureate and economic scholar Paul Krugman investigates the forces that drive economic growth and recession. His ability to maintain the essence of a topic while simplifying complex economics with examples and analogies is a hallmark of his work. Despite its gloomy title, this book is not depressing, because Krugman concludes that another Great Depression is not looming. Capitalism has, overall, provided the foundation for prosperity in advanced and developing economies alike. Indeed, the information age has introduced entrepreneurs who have generated wealth while becoming romantic heroes for succeeding in spite of - or without the help of - giant corporations. However, Krugman stays alert for dark forces, warning against panic in the international financial markets, where multiplying negative feedback can overwhelm the effects of monetary policy. getAbstract recommends Krugman's in-depth analysis to anyone with an interest in world economics and financial markets.
The Need to Want More
The global economy will not enter a depression reminiscent of the 1930s. However, a large part of the world must become sensitive to the forces of "depression economics," the types of fiscal problems not witnessed since the Great Depression. In fact, for the first time since World War II, low levels of economic demand, including insufficient private spending, have become the greatest hazard to prosperity for many economies.
The Success and Romance of Capitalism
The return of depression economics does not signal the failure of capitalism. In fact, depression economics has returned in the midst of the triumph of capitalism. The former Soviet Union - once the financier of worldwide socialist movements - has lost its ability to support other nations. Russia's economy is in a miserable state. In addition, Hong Kong's capitalist system, virtually untouched despite the island's return to China in 1997, shows the world that the free market is too valuable to destroy, even in the eyes of the People's Republic.
Not only has capitalism brought economic success and prosperity to many nations, it has developed a new kind of romantic hero. After Henry Ford, giant corporations dominated the economy. They were not run by romantic innovators, but by bureaucrats who might as well have been government officials. However, the information age now has created a renaissance of independent entrepreneurs whose heroic tales are chronicled in business magazines.
The Mechanics of an Economic Slump
Excess supply, relative to demand, characterizes an economic slump. Workers outnumber jobs and production capacity exceeds demand. Purchases of some goods may increase or decrease depending on shifts in preferences or costs, but it is less obvious why the overall demand for all goods might fall. Because the real economy is very complex, a simple analogy provides the best explanation.
A babysitting co-op was set up for 150 couples with young children. At the start, the organizers distributed a set number of coupons evenly among the families. When one couple babysat for another, they earned a coupon. After a certain period, members began to sense that there was a shortage of coupons in circulation. As a result, they became anxious to babysit in order to earn more coupons. At the same time, fewer members wanted to spend their coupons. Subsequently, opportunities to earn coupons diminished and the co-op entered a recession.
The babysitting slump occurred due to a lack of effective demand, not due to poor quality babysitting, a change in babysitting technology or even corruption. The problem had two basic solutions. The first was to require each couple to go out at least twice a month. The second, preferred by economists, was to increase the supply of babysitting coupons. Upping the supply had magical results...
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