Magazine article The Times Higher Education Supplement : THE

Eruption Leads to Hot Growth Ideas

Magazine article The Times Higher Education Supplement : THE

Eruption Leads to Hot Growth Ideas

Article excerpt

Two economists aim to put the crisis to rights with the help of Iceland's ash cloud, finds Howard Davies.

The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It

By Peter Temin and David Vines

Princeton University Press 320pp, Pounds 19.95

ISBN 9780691157436 and 9781400846641 (e-book)

Published 4 February 2013

Peter Temin, of the Massachusetts Institute of Technology, was left stranded in the UK when Eyjafjallajokull erupted in Iceland in April 2010. He and David Vines, a fellow economist based at the University of Oxford, spent four days sharing "distress at the lack of understanding (of the financial crisis) in the popular press". They could have done the obvious thing and penned an "outraged of North Oxford" letter to the Daily Telegraph. Instead, three years later, they have produced a monograph explaining why policymakers have been doing so badly, and how they could improve.

Have they found the answer others have failed to see, or did Eyjafjallajokull erupt in vain?

Their argument is drawn from a reading of the economic history of the past 200 years. They characterise the period from Waterloo to the Wall Street Crash as one of British financial hegemony. This halcyon age ended when, after the First World War, Britain no longer had the financial resources to sustain its position. The reparations imposed on Germany, and the US failure to show a lead, brought about the Great Depression of the 1930s, the rise of the Nazis and the Second World War.

So far, so conventional. There follows a lengthy diversion that tracks the evolution of John Maynard Keynes' thinking, from The Economic Consequences of the Peace (1919) through the post-Wall Street Crash Macmillan Committee report to which he contributed, his 1936 General Theory of Employment, Interest and Money, and the 1944 Bretton Woods agreement on monetary management. The authors are unashamed pro-Keynesians; they worship the curves he drew.

In their reading, Bretton Woods led to the American "century", give or take a decade or three, which they believe ended with the recent financial crisis. They regard it as an "end of regime" event, just like the Great Depression. After decades of enlightened policies from the Marshall Plan onwards, the US economy moved into chronic external imbalance, with catastrophic consequences. Successive administrations "encouraged (unsustainable) expenditure through financial deregulation and a low level of interest rates. This unhappy combination caused the financial bubble, which led in turn to the crash." Instead, they should have "promoted a tighter fiscal policy and a devalued exchange rate". …

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