The Great Recession and the Great Depression

John Maynard Keynes wrote in the depths of the Great Depression that, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”1 This acute observation is applicable to our current Great Recession as well. In fact, the newly discredited ideas are not too different from the old, suggesting that Keynes may have overestimated the ability of people to learn from their mistakes.
I discuss the parallels between these two watersheds in recent economic history in three steps. The first and most important step is the causes of the crises and their relation to economic theory. The second step is the spread of the crises as they affected the whole world. I close with the final step, recovery—at least as far as we can see it at this point. Marx said famously that history repeats itself, “the first time as tragedy, the second as farce.”2 I argue that this observation also fits our current condition.

Both of these dramatic and costly economic crises came from the interaction of economic imbalances in the world economy and the ruling ideology of financial decision makers who confronted these imbalances. The first imbalance came from the First World War. This paroxysm of violence brought the long economic expansion of the nineteenth century to a sudden end. Britain, the workshop of the prewar world, was exhausted by the struggle. America, the rising economic behemoth, was unready to take responsibility for its new role in the international economy. Germany, having unsuccessfully challenged the Anglo Saxon powers, refused to acknowledge its defeat.
The easiest way to see the imbalance is through the international movement of capital. There were many reasons why this imbalance was allowed to grow over the postwar decade, and one of the