Confront economists' theories of depressions and what (if anything) the government should do about them and you find yourself immediately confronted with what look to be at least seven different theories:
- Monetarism, the doctrine of Irving Fisher and Milton Friedman, that a depression is the result of the money stock falling too low, where the money stock is the economy's sum total of liquid assets that are generally accepted as and held in people's portfolios for the usefulness as means of payment.
- Wicksellianism, the doctrine of Swedish economist Knut Wicksell, that a depression happens when the workings of the banking system lead the market rate of interest to be above the natural rate of interest that balances the supply of funds saved and the demand for funds to finance business investment.
- Minskyism, the doctrines of Hyman Minsky--and also Walter Bagehot and Charles Kindleberger--that a depression happens because of a panic and a flight to quality, as everybody tries to sell their risky assets and cuts back on their spending in order to try to shift their portfolio in the direction of safe, high-quality assets--which, of course, everybody cannot all do at the same time.
- Austrianism, the doctrine that because of past irrational exuberance and over- or malinvestment, that there is nothing of social value a large chunk of the labor force can do other than sit on its hands unemployed and wait for circumstances to change and profitable employment opportunities to open up.
- Vulgar Keynsianism, the doctrine that depressions happen because something has reduced the flow of aggregate demand.
- Hickianism, something you have forgotten from intermediate macroeconomics courses of a decade or two ago that involves IS and LM curves, which is actually a combination of monetarism (LM) and Wicksellianism (IS).
- Post-Keynsianism, which seems to be a combination of Wicksellianism and Minskyism.
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