C H A P T E R T W E N T Y - S I X A History of Postwar Monetary Economics and Macroeconomics Despite a degree of arbitrariness, World War II provides a natural division in the history of macroeconomics. The macroeconomics of the interwar period was a rich tapestry of competing models and methodologies | CHAPTER TWENTY-SIX A History of Postwar Monetary Economics and Macroeconomics Kevin D. Hoover World War II as a Transitional Period Despite a degree of arbitrariness World War II provides a natural division in the history of macroeconomics. The macroeconomics of the interwar period was a rich tapestry of competing models and methodologies pursued with a sophistication that was only gradually regained in the postwar period see chs. 19 and 20 Laidler 1999 . John Maynard Keynes s The General Theory of Employment Interest and Money published in 1936 three years before the onset of war in Europe appeared to many as an important but not preeminent contribution to the contemporary debates. Yet by 1945 Keynesian macroeconomics was clearly ascendant. Keynes provided a conceptual framework that greatly simplified professional discussions of macroeconomic policy. The main elements were i an aggregative analysis - his key distinction between the economics of individual or firm decision-making taking aggregate output as fixed and the economics of output and employment as a whole supplies the content if the not the name of the now common distinction between microeconomics and macroeconomics ii the determination of aggregate output by aggregate analogues to Marshallian supply and demand iii the possibility even likelihood that aggregate supply and demand could determine a level of output at which resources were not fully employed and iv the possibility that monetary and fiscal policies could boost aggregate demand to counteract unemployment. The decade after the publication of The General Theory was a period of exploration investigation and consolidation - a period in which the Keynesian model 412 K. D. Hoover was forged into the paradigm that guided mainstream macroeconomic analysis for the next three decades. John Hick s 1937 IS-LL model later renamed the IS-LM model emerged as the canonical representation of the Keynesian system. The downward-sloping IS curve represented
