The slumps experienced in Latin America in 1995 and East Asia in 1997 provide a warning, says Paul Krugman, that the response of orthodox economics to these events is inadequate. Whether advocating capital controls in the face of speculative fever (Malaysia) or suggesting targeted inflation for a stagnating economy (Japan), he is not afraid to challenge what J K Galbraith calls the "conventional wisdom" of economics (The Affluent Society, 1958).
This book was written in the aftermath of the Asian economic crisis and draws extensively on the events of the period, as he acknowledges in his introduction to this paperback edition, the original topicality has been diluted. Its continued relevance should not be doubted as the US economy approaches a feared recession following a decade of growth and Japan's economy remains stagnant and in need of imaginative solutions of the sort described by Krugman here.
The Return of Depression Economics reminds us that the problems which caused depression in the 1930s need to be addressed and resolved anew by each generation. The solutions to the problems of the recent past (such as inflation) do not necessarily provide and answer to the problems of today and we sometimes need to look beyond the "conventional wisdom" to find answers which work.
The first chapter reviews the hubris surrounding the speech on the new world order given by George Bush (senior) and the belief that capitalism and globalisation had secured a golden future in the aftermath of the collapse of the soviet union between 1989 and 1991. Krugman then survey's the so-called Asian economic miracle and highlights not only the weaknesses of structure (such as cronyism and poorly monitored banking industries) but also importantly recognises that these weaknesses existed long before the crash and so cannot credibly be used to explain the immediate cause of the crisis. Nor, he argues, did these concerns need to dominate the attempts of the IMF and World Bank to provide aid and help restore economic health. The author was an early contributor to the debate, writing 3 years before the crash (in The Myth of Asia's Miracle, 1994) of his doubts about the sustainability of growth based on expansion of inputs rather than improvements in productivity (to summarise his argument in arrogant simplicity).
Chapter 3 reviews the experience in Latin America, where the "Tequila" crisis of 1995 demonstrated that a collapse in a visibly troubled economy (in this case Mexico) can be transmitted to an innocent and generally well-regarded economy (Argentina), an experience repeated in Asia. Paul Krugman then discusses the stagnation of Japan since the collapse of the property bubble in the late 1980s and outlines both his analysis of the problem (a liquidity crisis which means that even nominal interest rates of 0% have failed to boost demand) and his solution (targeted inflation which will generate negative real interest rates and encourage, it is argued, consumption).
Krugman's discussion of the unfolding events of the 1997 crisis describes the self-fulfilling panic which gripped Western investors in the region, the importance and ephemeral quality of confidence, and the attempts by the IMF to provide support. The next chapter focuses on international villains: the hedge funds and international speculators whose actions sometimes intensify, or even create, crises. Here there is discussion of the role of capital controls, strictly against the teaching of orthodox theory but which, since they were tried in Malaysia have gathered a degree of support from some academic observers (Kaplan and Rodrick, 2001, Did Malaysia's Capital Controls Work?). Finally Krugman reviews the prospects, as seen in 1999, for a return to growth in the Asian economies (optimism which has continued to be supported by events).
This book is written in a accessible style, the tone relaxed and makes extensive use of examples in domestic settings (that is the domestic setting of a middle class family on the East Coast of the USA, they are less accessible to UK readers, but still help illustrate his arguments). There is little to exclude readers with no background in economics and if you are inspired to search for more technical discussions you can refer to the author's own website which contains many of his papers on the subjects discussed.
Paul Krugman's writing on the Asian economic crisis has the authority of a long term observer of the region's economy: scepticism in 1994 (as mentioned above) has been followed by detailed analysis after the crisis. The ideas discussed in this book reflect Krugman's recent writings on the subject (What happened to Asia, 1998; Analytical Afterthoughts, 1999; Japan's Still Trapped, 2000).
However, although he is willing to challenge the orthodox (by suggesting capital controls or targeted inflation), Paul Krugman does write from within the dominant tradition of neoclassical economics, he is committed to globalisation and believes in the benefits of free trade for developing countries. This book should not be dismissed either because of its deviation from the orthodox or because it fails to challenge the basis of neoclassical economics, instead it highlights inconsistencies within the dominant tradition and suggests that you don't need to be a wild-eyed radical to perceive inadequacies with the international response to recent crises.