The Macroeconomic Revolution in Theory and Practice

The Wall Street crash of 1929 and the ensuing economic crisis, the Great Depression, was exacerbated by the return to the gold standard in many countries after the war and led to global economic downturns. Sweden abandoned the gold standard in 1931 and emerged from the depression faster than many other Western countries. The Swedish Social Democracy evolved into a radical reform party and began its long-standing period in government in 1932. Gunnar Myrdal developed a dynamic theory where the future expectations of households and businesses played a central role. Stockholm economists, finance minister Ernst Wigforss and his closest ally Myrdal developed the theoretical reasons for expansive fiscal policy in a depression, which became practical policy in Sweden. Sweden’s recovery also involved currency depreciation and a pioneering price level target for monetary policy. The consensus between the employers’ organization and the workers’ organization culminated in the establishment of negotiation rules to prevent costly conflicts. In line with Myrdals theory, improved and credible future expectations played an important role when economies began to recover during the depression, first in Sweden and then in the USA.