And you thought physics and economics weren't related. In the decades following World War II, economists believed they had finally cracked the code. John Maynard Keynes had given them a framework as powerful, in its own way, as Newton's laws of motion. The economy, Keynes argued, could be managed like a machine. When recession threatened, governments should increase spending to stimulate demand. When inflation loomed, they should pull back. The equations were elegant. The logic was compelling. And for nearly three decades, it worked. Finance ministers spoke with the confidence of engineers. Central bankers made pronouncements with Newtonian certainty. The business cycle—that chaotic swing between boom and bust that had plagued capitalism since its inception—could be smoothed out through careful adjustment of a few key variables. Unemployment and inflation moved in predictable, inverse relationships. Push one down, the other rises. Pull the right levers, and you could keep both ...
