In his 1936 book ‘The General Theory of Employment Interest and Money’ John Maynard Keynes outlined how rather than being independently rational, investors were often prone to erratic herd-like behaviour. He argued that macroeconomic stability is inherently vulnerable to the ‘animal spirits’ of speculators. The recent deflation of the post Global Financial Crisis (GFC) gold price bubble is a prime example of this phenomenon.
John Maynard Keynes
By 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.