Quarterly Journal of Austrian Economics
Review of The Forgotten Depression by James Grant
For as long as every living economist has been plying their trade, a single historical episode has been taken as an experimentum crucis. Latin for “crucial experiment”, it is what Isaac Newton used to call an observed outcome significant enough, by itself, of determining the validity of a theory. The event serving this function in present-day economics is the Great Depression. And it was John Maynard Keynes and his followers that originally established that as the experimentum crucis by arguing that the Great Depression conclusively refuted the classical view that markets are self-correcting and that, therefore, the government has a necessary role to play in countering economic slumps through increased expenditures. Even the critics of the Keynesian school ended up accepting the 1930s as pivotal. Famously illustrating this was Milton Friedman with his thesis that blame for the Great Depression ought to be laid at the Federal Reserve for running an overly tight monetary policy. Not just in the U.S., but throughout the developed economies, both these interpretations of the 1930s, traditional Keynesian and monetarist, have come to undergird public policy amidst the various economic stresses that have engulfed the globe since the financial tsunami of 2008. Central banks the world over have resorted to the monetary tap known as quantitative easing. Governments have bolstered their social insurance regimes and poured money into public works.