The kind of economic trouble that Asia experienced a decade ago, and that we're all experiencing now, is precisely the sort of thing we thought we ha… - Paul Krugman

In this part of the lecture I have argued that a number of works in development economics written during the 1950s contained, more or less explicitly and more or less self-consciously, a theory in which strategic complementarity played a key role in development: external economies arose from a circular relationship in which the decision to invest in large-scale production depended on the size of the market, and the size of the market depended on the decision to invest. Whatever the practical relevance of this theory, it made perfectly good logical sense. Yet this was subsequently abandoned, to such an extent that classic papers in the field began to seem, as the physicist Wolfgang Pauli used to say, "not even wrong" — simply incomprehensible.

So the story of the baby-sitting co-op is not a mere amusement. If people would only take it seriously—if they could only understand that when great economic issues are at stake, whimsical parables are not a waste of time but the key to enlightenment—it is a story that could save the world.

The best you can say about economic policy in this slump is that we have for the most part avoided a full repeat of the Great Depression. I say “for the most part” because we actually are seeing a Depression-level slump in Greece, and very bad slumps elsewhere in the European periphery. Still, the overall downturn hasn’t been a full 1930s replay. But all of that, I think, can be attributed to the financial rescue of 2008-2009 and automatic stabilizers. Deliberate policy to offset the crash in private spending has been largely absent.