The World Economy, Macroeconomic Theory and Policy—Sixty Years of Profound Change

Summary

This is a single-author scholarly lecture/occasional paper, prepared for the Antonio Feltrinelli Prize and later reprinted. Its scope is panoramic: Haberler moves from the First World War through the Depression, the post-1945 boom, the Keynesian and monetarist revolutions, and the late-1970s crisis of inflation and unemployment. His thesis is that twentieth-century macroeconomic outcomes were deeply shaped by policy regimes: interwar disaster came from monetary, exchange-rate, and protectionist mistakes; postwar prosperity came from avoiding deflation, restoring sound finance, and liberalizing trade; the contemporary malaise came from inflationary policy operating inside rigid, pressure-group economies.

The fratricidal European war of 1914–1918, the first global conflict since the Napoleonic wars a hundred years earlier, was a watershed.

Haberler treats 1914 as the end of the liberal international order—free trade, gold, migration, and travel—and the Depression as the event that discredited capitalism politically as much as economically. He emphasizes American centrality: the United States became the dominant power, then generated and transmitted collapse. His account rejects secular-stagnation explanations of the 1930s. Keynesianism, in his view, correctly focused attention on mass unemployment, but its historical diagnosis was too private-demand centered and too ready to normalize government deficits.

We now know that money had a lot to do with the Great Depression.

The phrase marks the paper’s major revisionist move. Haberler attributes the depth and duration of the slump to the Federal Reserve’s failure to prevent a massive contraction of money, together with international mismanagement of gold parities, delayed devaluations, exchange controls, and protectionism. Yet he does not offer a crude anti-Keynesianism: once deflationary expectations are entrenched, direct fiscal injection may be useful because ordinary monetary expansion works slowly and may later leave inflationary liquidity.

Despite the seemingly poor prospects and contrary to the pessimistic forecasts especially by Keynesian economists—not so much Keynes himself—that the dismal developments of the interwar period would repeat themselves, the first thirty-five years since the end of the war have been a period of almost unprecedented growth and prosperity.

The postwar “great surprise” becomes Haberler’s counterexample to interwar fatalism: no comparable depression, rapid European and Japanese recovery, GATT trade expansion, and Marshall Plan support. But he interprets the economic miracles not primarily as triumphs of demand management, but as returns to sound-money, balanced-budget, market-oriented policies. Keynes, he argues, was less casually inflationist than many followers; monetarism rightly restored money to the center, especially in explaining the Depression.

We have learned that inflation is not a permanent cure for unemployment.

This is the conceptual hinge of the later argument. The Phillips-curve trade-off is only temporary because expectations adapt; inflation loses its employment effect, damages productivity, and becomes stagflation. Haberler connects macroeconomic instability to institutional rigidity: unions, indexation, subsidies, protectionism, and government rescues of failing industries obstruct adjustment.

Inflation has become so intractable and the fight against inflation so difficult because the economy has become so inflexible and so far removed from the competitive ideal.

His policy program follows directly. Monetary restraint is indispensable, but it must be supported by fiscal restraint, preferably expenditure cuts rather than tax increases, because deficits crowd out investment and make disinflation more painful.

Restraint on monetary growth is certainly a necessary condition for a successful anti-inflation policy.

The conclusion presents two scenarios: continued stop-and-go policy leading to hardened expectations and wage-price controls, or credible tight money, tight budgets, and liberalizing structural reform. The paper’s relevance lies in this synthesis: Haberler writes at the transition from Keynesian confidence to anti-inflation orthodoxy, but his broader claim is that macroeconomic stability depends on the fit among money, fiscal policy, trade openness, and competitive institutions.