Introduction

Keynes wrote of his General Theory of Employment, Interest, and Money (1936) that it was “an attempt to bring to an issue deep divergences of opinion between fellow economists which has for the time being destroyed the practical influence of economic theory.” That seems not unlike the situation at the moment. A heated discussion between rival schools has been going on in the blogosphere; of this, hardly an echo appears even in the financial press. The foremost battle concerns the effects of the “stimulus.” This is waged between the “freshwater economists” of Chicago University and the “saltwater economists” of the east and west coasts. Eugene Fama, who is a Professor of Finance at Chicago University, and the godfather of the Efficient Market Theory, encapsulated the Chicago view when he said that all a stimulus did was to shift resources from the private to the public sector of the economy, so that its stimulating effect was, in effect, zero, or even less. An enraged Paul Krugman responded that this was to take economics back to the dark ages. The historically minded will recall that this is a re-run of the debates about policies for the Great Depression. Keynes wrote his General Theory to refute the “Treasury View” of the 1920s that the only effect of public spending was to “crowd out” private spending.