Ambulance Economics

By W. Max Corden


W. Max Corden

When I was a student at Melbourne University’s Commerce Faculty immediately after the war – from 1946 to 1949 – the memories of our parents, and of the ex-servicemen who came back from the war, were of the Great Depression. Never again! It was a memory of unemployment and of real misery, either experienced directly or endlessly heard about from our parents.

Richard Downing was a young and charismatic lecturer in the Faculty who had spent time first at the University of Cambridge and then in Geneva with the International Labour Office. He brought back to Melbourne the message that economists had found a solution to the problem. There need not be another depression. This solution has come to be known as Keynesian economics, and in subsequent years has provided the basis for undergraduate textbook macroeconomics.

I was influenced by this enthusiasm, and especially by Downing. Ever since, in my view, John Maynard Keynes was the greatest economist. Of course there were others, notably Adam Smith, David Ricardo and Alfred Marshall – all from Britain – but Keynes has made the greatest difference to macroeconomic policies and perhaps to welfare in developed countries. And we have indeed not had another great world depression.

As every student knows, Keynesian policy involves the government and the central bank managing aggregate demand through monetary and fiscal policies so as to steer the economy to avoid both excessive inflation and excessive unemployment. The central bank manages monetary (or interest rate) policy and the government manages fiscal policy, the latter in the form of varying fiscal deficits or surpluses. Usually monetary policy is more flexible and is manipulated to obtain short-term equilibrium.

But a real problem arises when aggregate demand needs to be increased to avoid excessive unemployment, but normal monetary policy has become ineffective (or rather weak in its effects). That is exactly what happened in the United States and some other countries in 2008, or even earlier in Japan. And it is then that Keynesian fiscal policy turned out to be really important. Even if governments were already in substantial debt they had to run deficits – and to do so quickly – to avoid a serious recession, one that might even turn into a depression.

I wrote an article about that time entitled “Ambulance Economics: the pros and cons of fiscal stimuli” which was all about the world having had a heart attack and the “Keynesian ambulance” having to come to the rescue[1]. Suddenly, what I had learnt at Melbourne University at the age of 22, turned out to be very relevant – more relevant than much that had been introduced into macroeconomic courses since those years.

To reflect on this situation in which many countries, notably the United States, found  themselves, one has to understand  the reasons why monetary policies can become ineffective. There are actually three. Some of these applied at that time to the United States and some even earlier to Japan. First, interest rates might have been brought down close to zero, and could go no further, and yet a lack of aggregate demand remained. Second, there had been a financial crash especially affecting banks, so that commercial banks and other intermediaries would not lend to private firms in need even though there were firms and households wanting to borrow. And thirdly, the central bank may have scope for lowering interest rates, and private banks may be willing to lend, but firms and household may not wish to borrow because they have got themselves greatly into debt and prefer to pay off their debts. This is called “deleveraging” and usually happens after a big boom caused by a “borrowing binge”.

So fiscal stimuli are needed even when governments already have big debts. If they avoid fiscal expansions because of their existing debts, they may allow a country to sink into a prolonged recession – and, at the worst, into a real depression.

These have been serious issues since 2008, and particularly now in Europe. Australia, the lucky country, has escaped many of the problems. The United States did have a fiscal stimulus in 2009, but many economists (like myself) thought it was not enough. Yet others opposed the policy because the US government already had big debts. Perhaps the answer is that in good times governments should run surpluses – and certainly pay off their debts – so that in bad times they can increase the debts and get a solid “Keynesian stimulus”. Another answer is that fiscal deficits should finance public investment of long-term value, rather than just financing current consumption or investment with low social value. The increase in long-term government liabilities caused by higher debt would then be matched by increased national assets.

That is just my opinion!  You don’t have to agree with me, except to concede that the issues have lately been very important. John Maynard Keynes and Richard Downing would certainly think so.


W. Max Corden is an Australian economist who is most well known for developing the international trade model “Dutch Disease”. He is a graduate of the University of Melbourne and completed his Ph.D in economics at the London School of Economics. He has worked at a number of Universities nation wide and is currently meritus Professor of International Economics at SAIS and a Professorial Fellow in the Department of Economics of the University of Melbourne.

[1] “Ambulance Economics: the Pros and Cons of Fiscal Stimuli”, Policy Insight No 43, Centre for Economic Policy Research , January 2010,

8 thoughts on “Ambulance Economics”

  1. Great article, it’s good to hear from people from different generations.

    Don’t know if Max will be able to see or respond to comments, but one thing I’ve noticed is that comparatively speaking, Keynesian economics is pretty young, despite being fairly intuitive. Admittedly, this comes from a student who has grown up on Keynesian textbooks! For example it always impresses me, when a maths lecturer tells us that something we are struggling to understand (looking at you real analysis) was already being developed way before the 1900s.

    Perhaps Max could shed some light on this?

  2. A great article from a great Economist. Really well explained take on Keynesian Economics and its relevance in modern day life. If only that ambulance could come quickly to the rescue again!

    Even though it sounds intuitive from an Economists’ point of view that they should run surpluses in good times for long-term benefit and some sort of ‘safety net’, I think a lot of politicians and policy-makers get increasingly pressured into spending these surpluses in good times because people without such foresight tend to ask ‘why are we saving so much cash if it’s a ‘good time’?’ To the common man, spending in good times seems the more intuitive answer, and I think sometimes this gets in the way.

  3. @lolimar

    Not too sure what you are wanting Max to shed light on here. Are you wondering whether the age of a theory is a reflection on its applicability or relevance? Perhaps you could clarify your comment?

    @ Danny

    “If only that ambulance could come quickly to the rescue again!”

    I am curious to know whether or not you are advocating another round of stimulus spending?

    I definitely agree that voter perception of what is the most reasonable/beneficial solution to a given economic problem is often a major obstacle to governments trying to act upon the advice of economists. Unfortunately in a democracy there is no easy solution to this problem, particularly when politicians are often all too happy to side with popular opinion and in fact have a strong incentive to do so. I am a strong advocate for financial and economic literacy to be made compulsory in high schools, so that all adults have at least a rudimentary understanding how to manage their personal finances (credit card debt, mortgages etc) as well as providing a solid base from which politicians are better able to explain public policy.

  4. Fantastic article, Professor Corden. Now, you mentioned the importance of surpluses in good times – do you believe this is the right time for Australia to be pursuing surpluses? Or is it too early given the continued uncertainty in the global economy?


    David, you are exactly right about the need for financial and economic literacy to be an essential part of a student’s education – I see it on par with the importance of basic literacy and numeracy. It will definitely help rationalise the policy discussion we have in Australia, and make sure people see through cheap, political point-scoring that is currently used by politicians to great effect.

  5. Amazing article and a great reminder as to why so many people in the class of ’09 loved Economics!! The application of Keynesian Economics directly to the crisis unfolding around us was fascinating.

    I do have to say, I find it amusing that depending on the times and global circumstances, different types of Economic theories, for example Keynes’ government intervention and Hayek’s free markets, become the dominant view.

    I wonder if it’s possible to found an approach which embraces both or if it’s simply impossible?

  6. @ Dave and Dean,

    Yes, we definitely could do with a lot more Economic literacy! For all the points that Dean mentioned, to be able to see through the political spin and the sensationalised statistics and other ‘common sentiment’ that goes around. I think that people do get disillusioned by the seeming technicality of Economics and Financial literacy, and also are slightly turned off learning such terms when they begin to associate words such as ‘interest rates’ or ‘debt’ or ‘surplus’ with the images of greedy capitalists and executives, or images of GFC and financial mismanagement. All we’re trying to do is help people run an organised market system to allow production to be made to benefit society! Maybe they don’t realise that their apathy to learning such terms are possibly exacerbating the problem…then again the role that Financial Institutions/Consultancies have played in obfuscating rather simple concepts to create a higher perceived level of ‘expertise’ that they can profit from may also be what is turning everyday people away from the possible ‘minefield’ that may be Economics literacy.

    I wonder if State-run governments do any better without the democratic pressure? Prima facie, I don’t think so…

  7. “Not too sure what you are wanting Max to shed light on here. Are you wondering whether the age of a theory is a reflection on its applicability or relevance? Perhaps you could clarify your comment?”

    I guess what I implied was that the age of the theory had something to do with it’s intuitiveness. That is the theory we developed in the subject Real Analysis and Applications (Maths), even the basics, I would say bears a higher opportunity cost for most people to learn compared to the basics of Keynesian economics. Maybe I haven’t done enough in macroeconomics, but I don’t really see it getting any more difficult than a maths subject like that.

    Given that Keynesian economics was developed somewhere in the 1930s, whereas the Real Analysis was being developed as early as the early1700s, is there a reason for why a topic that might have a lower opportunity cost to learn was developed much, much, later?

    On an unrelated note, has anything happened to logins?

  8. “David, you are exactly right about the need for financial and economic literacy to be an essential part of a student’s education – I see it on par with the importance of basic literacy and numeracy. It will definitely help rationalise the policy discussion we have in Australia, and make sure people see through cheap, political point-scoring that is currently used by politicians to great effect.”

    During my high school years, I had a subject running through year 9 and 10 running through a semester for each year which was called business studies and aimed at providing an introduction to economics (discussing macro issues, basic supply and demand), accounting and politics. I think it did a good job of that, and is what I would imagine would be good as part of a student’s curriculum, but as far as it goes for compulsory learning.

    It’s really a question of allocative efficiency from a student’s learning point of view. Some students like their maths and should focus on that. Some students enjoy their English or history, so they specialise in that. It’s good to give students an awareness of economical issues, but asking the ones who don’t enjoy economics, to have a proper more in-depth treatment of economics would be a waste of the student’s own time, effort, and a waste of teaching resources too.

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