Joseph Stiglitz examines the theory behind the economic downturns that have plagued our world in recent times. This fascinating three-part lecture acknowledges the failure of economic models to successfully predict the 2008 crisis and explores alternative models which, if adopted, could potentially restore a stable and prosperous economy.

This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence? The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration. Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.

This book rethinks economic theory and calls for a creative and pragmatic approach to policymaking. It examines what development and sustenance of economic progress mean, and how these may be facilitated. The relevance of this issue has received fresh impetus from the significant changes in the degree and pattern of international economic relations that are unfolding across the world, posing both opportunities and challenges. While globalisation of goods and financial markets may have delivered high growth for some nations, the distribution of the benefits has often been highly unequal, with gains to owners of capital and skills being disproportionately higher compared to that of labour, especially the unskilled. Widening and persistent inequalities have been at the heart of rising polarisation and spread of conflicts that threaten the social fabric. This work emphasises the relevance of a broad policy framework based on building individual capabilities and in line with a human-centric perspective. At the same time, it points out the crucial need to create policy space for macroeconomic stability and to accommodate heterodox influences, especially when conventional wisdom proves inadequate, as starkly demonstrated inter alia during the recent global financial crisis. This festschrift, dedicated to Deepak Nayyar, presents chapters on diverse themes that address the persisting global problems of poverty, inequality and sustaining development. The book will be of great interest to scholars and researchers of economics, development studies, public policy and governance, and also to policymakers, government officials and those in media.

“A concise and powerful account of how the great recession happened and what should be done to avoid another one . . . well-argued and consistently informative.” —Wall Street Journal The Great American Recession of 2007-2009 resulted in the loss of eight million jobs and the loss of four million homes to foreclosures. Is it a coincidence that the United States witnessed a dramatic rise in household debt in the years before the recession—that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion? Definitely not. Armed with clear and powerful evidence, Atif Mian and Amir Sufi reveal in House of Debt how the Great Recession and Great Depression, as well as less dramatic periods of economic malaise, were caused by a large run-up in household debt followed by a significantly large drop in household spending. Though the banking crisis captured the public’s attention, Mian and Sufi argue strongly with actual data that current policy is too heavily biased toward protecting banks and creditors. Increasing the flow of credit, they show, is disastrously counterproductive when the fundamental problem is too much debt. As their research shows, excessive household debt leads to foreclosures, causing individuals to spend less and save more. Less spending means less demand for goods, followed by declines in production and huge job losses. How do we end such a cycle? With a direct attack on debt, say Mian and Sufi. We can be rid of painful bubble-and-bust episodes only if the financial system moves away from its reliance on inflexible debt contracts. As an example, they propose new mortgage contracts that are built on the principle of risk-sharing, a concept that would have prevented the housing bubble from emerging in the first place. Thoroughly grounded in compelling economic evidence, House of Debt offers convincing answers to some of the most important questions facing today’s economy: Why do severe recessions happen? Could we have prevented the Great Recession and its consequences? And what actions are needed to prevent such crises going forward?

The world is in turmoil, the dynamics of political economy seem to have entered a phase where a ‘return to normal’ cannot be expected. Since the financial crisis, conventional economic theory has proven itself to be rather helpless and political decision makers have become suspicious about this type of economic consultancy. This book offers a different approach. It promises to describe political and economic dynamics as interwoven as they are in real life and it adds to that an evolutionary perspective. The latter allows for a long-run view, which makes it possible to discuss the emergence and exit of social institutions. The essays in this volume explore the theoretical and methodological aspects of evolutionary political economy. In part one, the authors consider the foundational contributions of some of the great economists of the past, while the second part demonstrates the benefits of adopting the methods of computer simulation and agent-based modelling. Together, the contributions to this volume demonstrate the richness, diversity and great explanatory potential of evolutionary political economy. This volume is extremely useful for social scientists in the fields of economics, politics, and sociology who are interested to learn what evolutionary political economy is, how it proceeds and what it can provide.

It was part of common wisdom that in the early stages of development inequality would rise, but it would, eventually, decline. As time passed and growth persisted, inequality has, however, continued to grow, casting doubt on the received wisdom.