I’m happy to admit that I underestimated how strongly governments would respond to this financial crisis. Dramatic reductions in interest rates, huge fiscal stimuli and—in the USA and UK—expansion of government-created money, have all had a positive impact on the economy and asset markets (both shares and houses).

In his recent essay, Aus­tralian Prime Min­is­ter Kevin Rudd esti­mat­ed that the res­cues were the equiv­a­lent of rough­ly 18 per­cent of glob­al GDP over a 3 year peri­od, which is an unprece­dent­ed lev­el of expen­di­ture by gov­ern­ments.

Eichen­green and O’Rourke’s com­par­i­son of today to the Great Depres­sion gives the most bal­anced assess­ment of how effec­tive these poli­cies have been at the glob­al lev­el.

Ross Git­tins has writ­ten a very good overview of the fail­ings of neo­clas­si­cal eco­nom­ics in today’s Syd­ney Morn­ing Her­ald:

Self-right­ing mar­kets and oth­er shib­bo­leths

The arti­cle men­tions the Dahlem Report, but does­n’t pro­vide a link to it. For those who would like to read it, here it is.

I also wrote a post on the Dahlem Report short­ly after it was writ­ten, and helped pub­li­cise it by plac­ing it on my blog. Giv­en that its tone was in some ways even more dis­mis­sive of con­ven­tion­al eco­nom­ics than I am, the title for this post was obvi­ous:

I delayed pub­lish­ing this on the blog because I thought it was worth sub­mit­ting it to a news­pa­per for first pub­li­ca­tion on the anniver­sary of the Lehman Broth­ers col­lapse. That has occurred: a slight­ly edit­ed ver­sion of this post (for rea­sons only of length, I has­ten to add!) is in today’s Syd­ney Morn­ing Her­ald (page 4 of the print ver­sion), WA Today, and prob­a­bly sev­er­al oth­er news­pa­pers in the Fair­fax chain.

You have just come from your annu­al med­ical check­up, where your doc­tor assures you that you are in robust health.

Michael’s vis­it is being organ­ised by Pros­per Aus­tralia, and they have asked me to link to their page detail­ing the tour and his speak­ing engage­ments while in Aus­tralia. It’s quite a good page, with some well cho­sen links to some of Michael’s research:

Pros­per Aus­tralia: Pro­fes­sor Michael Hud­son Tour­ing Octo­ber

The fund-rais­ing wid­get has so far raised A$305, which is pret­ty good–thanks to all those who have donat­ed so far. More dona­tions of course are wel­come: it would be good to hit the A$1,000 mark if at all pos­si­ble, which will fund Michael’s hotel accom­mo­da­tion while in Syd­ney and make a con­tri­bu­tion to the air­fares for him­self and his wife.

“Green shoots” are appear­ing everywhere—just read the news­pa­pers, and you can be assured that we’ve turned the cor­ner. Bar the lat­est rise in US unemployment—up 0.3% to 9.7%, after falling 0.1% the pre­vi­ous month—there’s noth­ing but good news as far as the eye can see.

Unless, that is, you take a look at a wider range of data, as eco­nom­ic his­to­ri­ans Bar­ry Eichen­green and Kevin O’Rourke have been doing in their series  “A Tale of Two Depres­sions”.

“The Marx­i­an view is that cap­i­tal­is­tic economies are inher­ent­ly unsta­ble and that exces­sive accu­mu­la­tion of cap­i­tal will lead to increas­ing­ly severe eco­nom­ic crises. Growth the­o­ry, which has proved to be empir­i­cal­ly suc­cess­ful, says this is not true.

The cap­i­tal­is­tic econ­o­my is sta­ble, and absent some change in tech­nol­o­gy or the rules of the eco­nom­ic game, the econ­o­my con­verges to a con­stant growth path with the stan­dard of liv­ing dou­bling every 40 years.

In the 1930s, there was an impor­tant change in the rules of the eco­nom­ic game. This change low­ered the steady-state mar­ket hours. The Key­ne­sians had it all wrong.

One of the rea­sons I’m still a bear on the econ­o­my is because the econ­o­mists in the opti­mists camp are rely­ing upon very bad eco­nom­ic the­o­ry. If that the­o­ry is telling them good times are ahead, that’s one of the best pre­dic­tors of bad times you could have.

This isn’t because the opti­mists are bad econ­o­mists, bad peo­ple, or any oth­er per­mu­ta­tion: most econ­o­mists I know are good at what they do, and are very well inten­tioned too.

It’s just that they were taught a crock of non­sense at uni­ver­si­ty, and they now build mod­els based on a crock of non­sense that they erro­neous­ly believe to be accu­rate descrip­tions of the real world.

I’m hap­py to admit that it’s very hard to hold a bear per­spec­tive, when all about there appear to be “green shoots”, yet accord­ing to my body clock it’s still hiber­na­tion time.

There are, how­ev­er, four fac­tors that keep me in my lair:

1. Good His­to­ry;
2. Bad Eco­nom­ic The­o­ry;
3. Good Eco­nom­ic His­to­ry; and
4. Good Eco­nom­ic The­o­ry

I’ll be speak­ing at the Aus­tralian Muse­um’s reg­u­lar month­ly talk this com­ing Tues­day evening on the top­ic of “The Next Great Depres­sion?”. In a nut­shell, the details are:

Title: Muse­um Aus­tralia Month­ly Talk
Loca­tion: Aus­tralian Muse­um (entry via William Street)
Start Time: 18:30
Date: 2009-08-25
End Time: 20:00

Book­ings and pre­pay­ment are essen­tial: call 02 9320 6225 to book.

The cost is $20 for mem­bers  of the Aus­tralian Muse­um and $30 for non-mem­bers. The event begins with light refresh­ments, fol­lowed by a one-hour talk, and then an open ques­tion time.