This chapter starts with the argument that the greatest benefit of the market is to make the best use of everyone’s enthusiasm and creativity, instead of making efficient allocation of given resources, as proposed by mainstream economics. The chapter analyzes the traditional theories (neoclassical growth theory and Keynesian economics) that economists use to explain economic growth. Their common shortcoming is ignoring the role of entrepreneurs. The chapter then outlines the entrepreneur-centric “Smith–Schumpeterian growth model” and the two functions of entrepreneurs (i.e. arbitrage and innovation). Arbitrage is the discovery of disequilibrium and exploitation of lucrative opportunities in markets under existing technological conditions and resources. Innovation creates or commercializes new things that did not exist, or breaks away from routines. With this perspective, it also gives a brief analysis of China’s economic growth over the last few decades.

Economic Consequences enjoyed an outright favourable reception in Turkey. This chapter illuminates the circumstances that made this possible. Of the Carthaginian peace-imposing treaties of the Paris Conference (1919), only the Treaty of Sèvres (1920) concerning the Ottoman Empire was annulled after a battleground victory (1922), and replaced by the Treaty of Lausanne (1923). An officer and a diplomat, Ali Fethi (Okyar), soon to become prime minister of Turkey, was a prisoner of war in Malta when he heard of Keynes’s book, acquired a copy, and translated it in 1920. Because the national leaders were anxious to know what awaited them in the peace talks, given the huge Ottoman debt they inherited, impending war reparations, and the discriminatory treatment they suspected, upon Ali Fethi’s release and return, the translation was published in 1922 by the official press in Ankara. It helped prepare the Turkish delegation to the Lausanne conference. This case provides us with an early example of Economic Consequences as a policy instrument in favour of a new international integration serviceable to peace and reconstruction in the face of an international conflict.

Chapter 5 provides a fragmentary introduction to macroeconomics that shows that highlights some of the philosophical questions macroeconomic models raise and relates them to equilibrium theory. Section 1 discusses how growth theory is linked to equilibrium theory. Section 2 considers how growth theory can be adapted to address questions about economic fluctuations, including recessions. Section 3 focuses on a simple influential Keynesian model of economic fluctuations. Section 4 discusses a specific relationship between employment and the rate of inflation (the Phillips Curve) that highlights methodological issues concerning causal inference and microfoundations that have led many economists to reject Keynesian economics. Section 5 develops these methodological issues further, highlighting the role of identities in macroeconomics.

This Chapter discusses the infamous economic crisis, the Great Depression, and its political and regulatory ramifications. After a devastating stock market collapse seemingly enabled by laissez-fair policy (“hands-off” governmental role in the marketplace), politicians turned to John Maynard Keynes for economic policy guidance. Keynes theorized that investment in infrastructure and public works projects could boost the economy by a multiplier factor. President Franklin D. Roosevelt also turned to Justice Louis Dembitz Brandeis to shape his administration’s regulatory policies. The legislature passed the Securities Act of 1933, which called for strict disclosure requirements compelling registered companies to regularly report financial statistics to investors and the public. This crucial piece of legislation created the Securities Exchange Commission (the “SEC”). Public sale of stock came under the purview of this powerful regulatory agency. In the wake of the Great Depression, a galvanized federal government, bent on protecting the American people from another economic catastrophe, passed a series of sweeping regulatory and legislative reforms collectively called The New Deal.

The New Deal had no single theory of economics. FDR and his advisers signed on to a number of sometimes inconsistent theories accounting for the Depression and promoting recovery. Some supported government spending to boost supply, some endorsed producer cartels, some opposed the growth of chain stores, and others had other favorite economic projects. The Court after 1937 was skeptical about the value of limiting chain stores, though it upheld some limits on their expansion. Otherwise it basically endorsed whatever econmic theory Congress and the states embodied in legislation, and allowed the administration to pursue relatively aggressive antitrust actions, inclduing some that challenged forms of producer cooperation that the Hoover and Roosevelt administrations seemingly had encouraged.

The role of government has evolved significantly over the past 150 years. In the late nineteenth century, only about 10% of GDP passed through the hands of government. This was consistent with the prevailing view that government should only be minimally involved in the economy. By 1960, public spending had increased to 25–30% of GDP as governments focussed on delivering their core tasks: rules of the game, public goods and services and basic safety nets. Private choice still predominated and safeguarded both economic and financial freedom. The Keynesian ‘revolution’ from 1960 to about 1980 saw government grow to 50% and 60% of GDP in some countries and to over 40% on average. Over the next two decades, the classical ‘counter-revolution’ propagated smaller states. Many countries began fiscal reform and rules-based policy-making gained prominence. Spending growth came to a halt, and in some cases reversed. The years since 2000 have seen a revival of Keynesian thinking. Countries engaged in expansionary policies before the global financial crisis and experienced new record highs in public expenditure and debt thereafter. Another wave of reforms brought spending down in some crisis countries in the 2010s. However, public spending ratios on average rose well above the level of 2000.

Chapter 2 provides an overview of theories and empirics of recession and depression, reviewing Austrian, Keynesian, and monetarist financial theories, and secular stagnation approaches to economic slumps. It looks at international , national, and regional recessions and the different shapes of business cycles (V, U, L and W). The chapter also discusses international dimensions of slumps and the scope and limits for undertaking countercyclical policies.