Knowledge that Transforms

tag=1 data=Are economists' traditional trade policy views still valid? by Robert E. Baldwin tag=2 data=Baldwin, Robert E. tag=3 data=Journal of Economic Literature, tag=4 data=XXX tag=6 data=June 1992 tag=7 data=804-829. tag=8 data=TRADE tag=10 data=Recent developments in trade theory have raised doubts whether economists should continue their traditional opposition to trade taxes and subsidies. tag=11 data=1992/4/11 tag=12 data=92/0735 tag=13 data=CAB

Suddenly, and somewhat unexpectedly, there seems to be a real chance for change in the way economics is taught in American colleges and universities. During the last two years, three different groups have taken a critical look at economics education and declared that change is in order. The Association of American Colleges (AAC), in conjunction with the American Economic Association (AEA), commissioned a study of the undergraduate economics major which has led to a report with several recommendations for reform (John Siegfried et al. 1991); in response to a National Science Foundation (NSF) symposium that revealed concern over the state of graduate education, the AEA formed the Commission

for at least three reasons. First, it is fun. A skillful narrator and analyst can bring alive exciting or important events, and that is enjoyable. Second, a study of history alerts economists to two important but usually neglected characteristics of economies, namely that they are sometimes strongly influenced by noneconomic factors-not only wars, but political impasses, charismatic leaders, or ideological beliefs deeply rooted in public or official psychology-and that contrary to what is usually assumed in formal modeling, the structure of economies changes over time as public attitudes change and as institutions evolve. Third, economists should study history, at least relatively recent history, because it is usually impossible to understand our institutions and attitudes without some appreciation of the events that shaped the legacy from our parents and grandparents. Barry Eichengreen has written a book that is likely for some time to become the standard reference on monetary and financial developments during the interwar period, 1919-1936.' It is traditional history, telling a story, or rather a series of stories, with more tables and charts and a stronger reliance on economic concepts than most histories, but little econometrics and no formal modeling. The interwar period, which contains what is still the most dramatic and traumatic economic event of the past century, the Great Depression, left a strong imprint on contemporary American, European, and world institutions and attitudes, such as the Securities and Exchange Commission, the Glass-Steagall Act requring the separation of banking from other activities, and the International Monetary Fund. In addition to telling an interesting story, Eichengreen helps us interpret those events in ways that may have lessons for the future as well. Eichengreen's most significant conclusion is that the Great Depression was due to attempts to adhere to a restored gold standard with inadequate international cooperation to make it work. That flawed behavior, in turn, must be understood in light of experience in the early 1920s, especially in three critical countries-France, Germany, and the United States. As the interwar period may not be well known to most readers of this Journal, I first sketch the main economic and political events. The next section indicates the influence of these events on post-World War II international institutions and behavior. I turn then to the various explanations that have been put forward for the severity of the Great Depression, and conclude with a commentary on Eichengreen's contribution to this literature, and to our understanding of the interwar period more generally.

THE THICK VOLUME under review, by Richard Layard, Stephen Nickell, and Richard Jackman, is an extensive econometric and theoretical study, using time-series and cross section data, of the central tendency of the unemployment rate and its fluctuations in 19 OECD countries since the mid-50s. It thus joins the company of several recent macroeconometric studies of employment determination using international time-series data. Of these it is easily the most far-ranging study to date though in its microscopic examination of social legislation it has somehow neglected a range of macro factors right under its nose. Readers will find an abundance of arresting claims and provocative positions to keep the critical juices flowing. For me the volume is significant not (or hardly at all) as an assemblage of particular modelings and findings but primarily as an early econometric expression of the paradigm shift we are now witnessing in macroeconomics. Once nearly made extinct by a neoclassical winter, a school of economists are today furiously at work on unemployment considered as an equilibrium phenomenon' springing from en-

This work was supported, in part, by a grantfrom the Social Sciences and Humanities Research Council of Canada. The paper was written mostly while the author was on sabbatical at the University of California, San Diego. I am grateful to everyone there for providing such a hospitable environment, and to Anil Bera, Russell Davidson, David Hendry, Timo Teriisvirta, Pravin Trivedi, three referees, and seminar participants at the University of -Indiana for helpful comments on earlier versions.