Keynes’ Life: 1931

I give an account below of Keynes life in 1931.

January–May 1931
On 27 January 1931, Friedrich Hayek arrived in London at the London School of Economics (LSE). Hayek gave four evening lectures at 5 p.m. from 27 to 30 January 1931 on “Prices and Production” (Howson 2011: 196), and these lectures were later published in England as the book Prices and Production (September 1931), an exposition of the Austrian Business Cycle Theory (ABCT). Hayek himself had returned to Austria by 14 February 1930, but he moved to Britain to take up a visiting professorship at the LSE in October 1931. Keynes did not attend Hayek’s LSE lectures, but Nicholas Kaldor had been at the LSE since April 1927 (to undertake a BSc. in economics), and presumably attended.

From winter 1930–1931 and the spring of 1931, Keynes was involved in drafting the report of the Macmillan Committee (Moggridge 1992: 509). This report was signed by Keynes on 29 May and made available on the 13 July 1931 (Moggridge 1992: 511).

On 15 January 1931, in a radio broadcast, Keynes pointed to the problem of a lack of public and private spending as a major role in causing the depression, and urged increases in public and private spending to lower unemployment (Skidelsky 1992: 383–384).

Keynes helped to organise the merger of the New Statesman and the Nation in January–February 1931, and Keynes himself became chairman of the combined board in February until he died (Moggridge 1992: 508). On the 7 March 1931, Keynes published an article called “Proposals for a Revenue Tariff” in the New Statesman and Nation, which presented the case for protectionism in Britain (Moggridge 1992: 509). Keynes proposed a tariff of 15% on manufactured and semi-manufactured imports and 5% on foodstuff imports, mainly to reduce the need for budget cuts or tax increases (Moggridge 1992: 512–513). Lionel Robbins wrote a reply to Keynes’ case for protectionism, published on 14 March 1931 (Howson 2011: 198).

In late February Keynes became ill with tonsillitis and influenza (Skidelsky 1992: 389).

On 4 May 1931, Piero Sraffa was appointed as Marshall Librarian at Cambridge.

From May to July 1931, Nicholas Kaldor attended the summer term at the University of Vienna as part of his research studentship at the LSE (Thirlwall 1987: 23), and on 1 August 1931, Kaldor was first appointed to a temporary lecturing position at the LSE (Thirlwall 1987: 27; in October 1932, Kaldor became a permanent Assistant Lecturer).

June–11 July 1931: Keynes in America
On 30 May 1931, Keynes sailed for New York with his wife and his visit lasted from June–11 July 1931. Keynes spent two weeks in New York and met numerous officials and bankers including Walter Case and Eugene Meyer (president of the Federal Reserve Board) (Skidelsky 1992: 390).

Keynes had been invited to the Harris Foundation seminars at the University of Chicago (an annual event) where he was to give a talk called “Unemployment as a World Problem” (Moggridge 1992: 518), and he gave three lectures on 22 June, 26 June, 2 July 1931 (Skidelsky 1992: 391).

Keynes was in Chicago from 22 June to 2 July 1931 (Moggridge 1992: 518). Curiously, Keynes, at this stage in his thinking, did not advocate a large-scale public works program in America, but thought interest rate policy should be the main tool for fighting the depression (Moggridge 1992: 518), and Keynes found that some Chicago economists were more supportive of public works programs to bring down unemployment than he was (Skidelsky 1992: 392). Skidelsky has suggested that some Chicago school economists were more “Keynesian than Keynes” in 1931 (Skidelsky 1992: 392).

Keynes spent his last weekend in America in New Hampshire, and on 11 July 1931 Keynes and his wife left New York for England, and during his return voyage Keynes wrote a memorandum called “Economic Conditions in the United States” which was later circulated to the Prime Minister, the Economic Advisory Council (EAC) and the Bank of England (Moggridge 1992: 519).

18 July–December 1931
When Keynes returned to England on 18 July, the 1931 world financial crisis was in progress, and Keynes was generally at Tilton over the months from July to September. On 11 May 1931 (before Keynes had left for America), the Austrian bank Kreditanstalt had collapsed. By late May 1931, the financial crisis had spread to Germany, where the Reichsbank suffered from serious losses of reserves. On 20 June 1931, Herbert Hoover announced the Hoover Moratorium, which was a one year moratorium on German debt re-payments, approved by Congress and, after some initial resistance by France, by fifteen other nations. Hoover also provided $100 million for the Reichsbank. But this did not prove sufficient and by late June and early July a severe external run on foreign exchange hit Germany (Moggridge 1992: 521).

By 13 July 1931, Germany was forced to introduce a two-day bank and stock exchange holiday, after the collapse of the Danat Bank (Moggridge 1992: 521). Britain was also hit by a severe outflow of capital: from July to September the Bank of England lost over £200 million in reserves in its attempt to maintain the pound sterling on the gold exchange standard (Moggridge 1992: 522).

In response to a request for advice from the Prime Minister, Keynes replied on 5 August 1931, and opposed austerity measures and declared that it is “now nearly certain that we shall go off the existing gold parity at no distant date” (Moggridge 1992: 523).

The crisis was so serious that Ramsay MacDonald (British Prime Minister) returned from summer holidays on 11 August, and held emergency meetings and a full Cabinet meeting on 19 August 1931 (Moggridge 1992: 534). Remaining on the gold standard was now impossible for Britain as borrowing in foreign currencies required severe cuts to government spending and tax increases, as the price of borrowing from the Bank of France, the Federal Reserve of New York and J. P. Morgan was their demand to balance the budget (Skidelsky 1992: 395). The conflict within the Labour party also destroyed the Labour government, as the Cabinet voted by 15 to 5 in favour of a revenue tariff, and also a majority would not support more than £56 million of budget cuts (Skidelsky 1992: 395).

In August 1931, there appeared the first of a two-part review of Keynes’ A Treatise on Money by Friedrich von Hayek in the journal Economica. The second part appeared in February 1932. Keynes did reply to Hayek, but the criticisms of Hayek were mostly irrelevant since Keynes soon came to repudiate many of the ideas in the Treatise.

On 24 August 1931, Ramsay MacDonald formed a National Government with the Conservatives, Liberals and a new National Labour group.

The history of governments in Britain in these years can be summarised as follows:

5 June 1929–24 August 1931 – Labour government with Ramsay MacDonald as British Prime Minister
24 August–27 October 1931 – First National Government with Ramsay MacDonald as British Prime Minister with Conservatives, Liberals and a new National Labour group
27 October 1931 – United Kingdom general election
5 November 1931–7 June 1935 – the Second National Government
7 June 1935–28 May 1937 – Stanley Baldwin is Prime Minister of Britain.

On 27 August, the new National coalition government decided to implement a program of austerity, with expenditure cuts and tax increases, and by 10 September 1931 it began to implement these measures.

On 16 September, Keynes addressed a group of MPs in the House of Commons, and he condemned the austerity budget as folly (Skidelsky 1992: 395–396).

But none of the measures adopted by the new National government stopped the capital flight from Britain, and when the Bank of England lost over £18 million on 18 September, it was decided to suspend the gold convertibility of the pound sterling after noon on 19 September 1931 (Moggridge 1992: 527).

On 20 September the government announced that Britain would abandon the gold exchange standard the next day, which then happened on Monday (21 September 1931) when a Gold Standard (Amendment) Bill was passed in Parliament (Moggridge 1992: 527).

Keynes went to London and stayed from 21 September to 10 October 1931, when he attended three meetings of the Economic Advisory Council’s Committee on Economic Information as well as a meeting of the Other Club (Moggridge 1992: 528). Keynes dined with the Prime Minister on 5 October 1931 and then visited Lloyd George at Churt (Skidelsky 1992: 400).

On 30 September, Keynes recorded a British Movietone newsreel, where he defended the suspension of the gold standard and predicted that British trade would benefit from the currency depreciation that resulted (Moggridge 1992: 528). This newsreel was screened in October 1931 and Keynes appeared in many cinemas in Britain, and can be seen here:



It was also in September 1931 that Ludwig von Mises visited London for an annual meeting of the British Association for the Advancement of Science, and Mises attended a dinner held for him at the LSE on 24 September (Howson 2011: 210). In September 1931, Friedrich Hayek also published Prices and Production.

From autumn 1931, a number of students and economists at Cambridge began to meet informally in Richard Kahn’s rooms in King’s College, Cambridge, to analyse and discuss Keynes’ A Treatise on Money. These included Piero Sraffa, Richard Kahn, Austin Robinson, James Meade, Joan Robinson, and Dennis Robertson (Moggridge 1992: 531).

By Lent term 1932 (January–March 1932), these meetings became a formal seminar held in the Old Combination Room of Trinity College, Cambridge, and were known as the “Circus,” though Keynes himself did not attend these meetings and Richard Kahn acted as an intermediary for Keynes (Moggridge 1992: 531–532).

On 5 October 1931, Hayek began teaching at the London School of Economics (LSE) as a visiting professor (Howson 2011: 206). Hayek and his family lived in Constable Close in Hampstead Garden Suburb (Howson 2011: 206).

From late October to November 1931 (in the course of the Michaelmas term at Cambridge), Keynes was ill with heart problems (Skidelsky 1992: 432–433).

Late in the year on 5 November 1931, Philip Snowden stood down as Chancellor of the Exchequer and was replaced by Neville Chamberlain (Chancellor of the Exchequer from November 1931–May 1937). On 27 November 1931, Keynes’ book Essays in Persuasion was published, which included many of his writings and essays from the 1920s onwards.

On 13 December 1931, Keynes addressed a socialist group on “The Dilemma of Modern Socialism.”

BIBLIOGRAPHY
Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Thirlwall, A. P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.

Keynes’ Life: 1930

I give an account below of Keynes life in 1930, the second year of the Great Depression.

January–May 1930
In January 1930, the second Hague Conference adopted the Young Plan on German reparations, and, as we saw in the last post, Keynes had corresponded with the leading members on the issue of German reparations. By early 1930, Keynes was beginning to think that an international slump was a possibility (Moggridge 1992: 483).

On 19 January 1930, Keynes’ friend Frank Plumpton Ramsey died after an operation for jaundice, which deeply saddened Keynes (Skidelsky 1992: 380).

On 24 January 1930, the British government established an “Economic Advisory Council (EAC),” chaired by the Prime Minister, which included the Chancellor of the Exchequer, the President of the Board of Trade, the Minister of Agriculture, Hubert Henderson (as senior economist), and Keynes, among others (Moggridge 1992: 481–482). This council had its first meeting on 17 February 1930 (Moggridge 1992: 482), and seems to have met once a month (Skidelsky 1992: 363). At the council’s first meeting a further “Committee on the Economic Outlook” was created and Keynes as the chairman (Skidelsky 1992: 363). To add to the confusion, yet another small committee of economists was established on 24 July 1930, with Keynes as the chairman, and Arthur Pigou, Hubert Henderson, Sir Josiah Stamp and Lionel Robbins as the other members, and Richard Kahn as one of the secretaries (Skidelsky 1992: 364). This committee met for the first time on 10 September 1930 (Skidelsky 1992: 364).

We can list these committees in which Keynes was involved in these years as follows:

(1) the Macmillan Committee (Committee on Finance and Industry) (21 November 1929–31 May 1931), chaired by Lord Macmillan (Dostaler 2007: 192).
This committee included Ernest Bevin, Lord Bradbury, R. H. Brand, Theodore Gregory, Keynes, and Reginald McKenna. The Macmillan Committee’s report was completed in May 1931, and published on 13 July 1931.

(2) Economic Advisory Council (EAC) (24 January 1930–1938)

(3) Committee on the Economic Outlook, created on 17 February 1930 with Keynes as the chairman.
This committee held meetings on the 21 March, 3 April, and 1 May 1930 (Moggridge 1992: 495).

(4) Committee of Economists (which met from the 10 September–23 October 1930), established on 24 July 1930, with Keynes as the chairman. This committee produced a report on 24 October 1930 (Dostaler 2007: 192).

In 1930, Keynes also participated to a great extent in the Macmillan Committee (which included Ernest Bevin). He was active in the examination of witnesses and in the production of the final report (Skidelsky 1992: 345), and it was in the debates within the Macmillan Committee that Keynes summarised his current economic thinking as he had developed it in the yet unpublished A Treatise on Money. Keynes also criticised general equilibrium theory by pointing to the relative rigidity of money wages in Britain in the 1920s, and Keynes even came to question whether money wages had ever been highly flexible even in the 19th century (Skidelsky 1992: 347; Keynes did, however, sometimes slip into Neoclassical explanations of money wage rigidity when he invoked the role of unemployment relief in February 1930: Skidelsky 1992: 347).

On 30 March 1930, Heinrich Brüning became Chancellor of Germany, an office which he held from 30 March 1930–30 May 1932. Brüning inflicted an austerity regime on the Weimar Republic, which exacerbated the Great Depression, and which effectively destroyed democracy in Germany.

Meanwhile in March 1930 in Britain, Keynes proposed deficit-financed public expenditure as a remedy to Britain’s economic malaise to the Macmillan Committee (Skidelsky 1992: 353). On 26 March 1930, Sir Ernest Harvey (deputy governor of the Bank of England) appeared before the Macmillan Committee, and Keynes’ role in questioning him, along with others, was considered a disaster for the Bank of England (Skidelsky 1992: 356). Curiously, as a defence against Keynes’ attack on bank policy, Harvey retreated into a version of the Real Bills doctrine and the idea that the Bank of England was mainly responsive to the needs of trade and could not directly control the volume of credit demand, which drifts into the modern endogenous theory of money (Skidelsky 1992: 357). It was in May 1930 that the Treasury official Sir Richard Hopkins appeared before the Macmillan Committee, and used an altered form of the now famous “Treasury View” against Keynes: Sir Richard Hopkins claimed that government deficit-financed public works might cause “psychological crowding out,” that is to say, a blow to business confidence and expectations (Skidelsky 1992: 361). Keynes now was forced to think more explicitly about the role of business “confidence” (or what would later be called “subjective expectations”) in determining investment (Skidelsky 1992: 361).

Skidelsky (1992: 362) notes that the inspiration for Keynes’ General Theory was in part a response to the opposition that Keynes had encountered to his ideas from the British Bank of England and Treasury officials during the Macmillan Committee.

On 23 April 1930, Keynes sent Ralph Hawtrey drafts of the Treatise, but Keynes himself did not have time to mull over Hawtrey’s criticism until November 1930 after the book was published (Moggridge 1992: 483).

In May 1930, the ruling Labour party was split in a great controversy over government policy in relation to the depression and the need for unemployment relief. The crucial figure within the British Labour party was the MP Oswald Mosley, who strongly supported deficit-financed public works programs. On 23 January 1930, Mosley had sent a memorandum to the Prime Minister in which he advocated direct government control of banking, protectionism, and large-scale public works programs financed by deficits (Dorril 2007: 130). These policies, along with an abandonment of the gold standard (which soon happened anyway in 1931), would certainly have cured the Great Depression in Britain. Mosley, influenced by Keynes, was therefore effectively proposing his own “New Deal” for Britain (Skidelsky 1992: 378).

On 8 February 1930, Mosley’s memo was leaked to the newspaper the Telegraph and provoked a minor crisis within the Labour party (Dorril 2007: 131). However, leading figures in the Labour party opposed this. In particular, Philip Snowden (1st Viscount Snowden), who was Chancellor of the Exchequer from 7 June 1929–5 November 1931 – despite being a socialist – favoured free trade, balanced budgets, and rejected public works programs to reduce unemployment. He also favoured export-led growth as a primary solution to the depression. This crisis within the Labour party in May 1930 is dramatised in this movie scene where Mosley appears before the Cabinet and his proposals are dismissed by Snowden:



These bizarre and Neoclassical policies held by influential figures in the Labour government – and in particular the appeal to export-led growth – destroyed the Labour government of 1929–1931, and, remarkably, also wiped out the German Social Democratic Party in Germany by 1933, as they too supported balanced budgets, sound money and crackpot Marxism.

On 28 May 1930, Oswald Mosley gave a powerful resignation speech in the House of Commons (Skidelsky 1992: 364), in which he attacked the Labour government’s “do nothing” policy. That speech can be read here, and Mosley rightly condemned “the belief that the only criterion of British prosperity is how many goods we can send abroad for foreigners to consume” (that is, by export-led growth).

June–December 1930
As the Great Depression deepened, Keynes rejected Marxist dogma that this was the final crisis of capitalism (Skidelsky 1992: 379).

His fundamental optimism – despite the disaster of the depression – can be seen in his essay “Economic Possibilities for our Grandchildren,” which was first given to the Winchester Essay Society, and then as a public lecture in Madrid on 9 June 1930 (Skidelsky 1992: 379). Keynes spent some ten days in Spain and returned to his home at Tilton, South Downs, where he continued to work on the Treatise over the summer (Skidelsky 1992: 380).

Keynes continued to be involved in the Macmillan Committee, which heard witnesses until the end of July 1930 and then adjourned until 16 October 1930 (Moggridge 1992: 495). It was also in July 1930 that Keynes came to endorse industrial protectionism as a policy to protect British industry (Moggridge 1992: 500).

On 25 September 1930, the British Cabinet of the Labour government rejected any further fiscal stimulus by public works and even accepted the need for limiting unemployment insurance (Moggridge 1992: 507).

In September and October 1930, Keynes also continued his work as chairman of the “Committee of Economists,” but the final report on 24 October 1930 was a complex mix of analysis and possible solutions to the economic problems faced by Britain because of the intense disagreements between Keynes, Pigou, Hubert Henderson, and Lionel Robbins (Skidelsky 1992: 374–377; Dostaler 2007: 192). The report was undoubtedly a failure in either advocating or urging any sensible Keynesian policy. Lionel Robbins, in particular, had been advocating the Austrian Business Cycle Theory (ABCT) in his analysis. Astonishingly, leading figures in the Labour party government favoured austerity and free trade, and rejected Keynes’ thinking (Skidelsky 1992: 377).

On 16 October 1930, the Macmillan Committee resumed its meetings normally for two days a week (Moggridge 1992: 507). Keynes took the lead in discussions by November and early December 1930 (Moggridge 1992: 507).

In October 1930, Keynes finally published his short essay “Economic Possibilities for our Grandchildren” in two parts in the The Nation and Athenaeum (see Keynes 1930a and 1930b), which was later reprinted in Essays in Persuasion (London, 1933). I have previously analysed Keynes’ essay here.

Keynes’ A Treatise on Money was published on 24 October 1930. I will not describe Keynes’ arguments in this book in detail. In brief, Keynes still assumed in this book that there were long-run forces bringing an economy to full-employment equilibrium; he assumed that investment was the most important driver of a capitalist economy, and that the rate of interest was in turn the main driver of investment (Moggridge 1992: 484–486). Keynes also adopted versions of Knut Wicksell’s concepts of the natural rate of interest (the rate at which savings would equal investment) and the market rate of interest (Moggridge 1992: 486).

BIBLIOGRAPHY
Dorril, Stephen. 2007. Blackshirt: Sir Oswald Mosley and British Fascism. Penguin Books, London and New York.

Dostaler, Gilles. 2007. Keynes and his Battles. Edward Elgar, Cheltenham.

Keynes, John Maynard. 1930a. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.3 (October 18): 96–98.

Keynes, John Maynard. 1930b. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.2 (October 11, 1930): 36–37.

Keynes, John Maynard. 1933. Essays in Persuasion. Macmillan, London.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Keynes’ Life: 1929

I give an account below of Keynes life in 1929, the year in which the Great Depression began.

January–May 1929
Keynes taught at Cambridge in the first half of the year. The teaching periods at Cambridge were divided into three terms:

October–December – Michaelmas
January–March – Lent or January term
April–June – Easter term.

On 18 January 1929, Ludwig Wittgenstein returned to Cambridge, and Keynes met him when he arrived, and allowed Wittgenstein to share his rooms at Cambridge until February 1929 (Skidelsky 1992: 291).

From 9 February to 7 June 1929, an international committee met to propose changes to the German reparations system, which was chaired by Owen D. Young, and called the Young Committee (Moggridge 1992: 476). Keynes corresponded with the leading members on German reparations and published a famous article called “The German Transfer Problem” in the Economic Journal of March 1929 (Moggridge 1992: 476–478).

Keynes also visited the Treasury on 7 March 1929 and recommended raising the bank rate to attract more capital from abroad (Skidelsky 1992: 302).

From March 1928 until the UK general election of May 1929, Keynes strongly supported David Lloyd George’s Liberal program of deficit spending and public works to cure the problem of high unemployment in Britain (Skidelsky 1992: 297). It was at this stage that the British Treasury formulated its so-called “Treasury View” opposing debt-financed public works. Curiously, the ruling British government included some ministers like the Home Secretary (Joynson-Hicks) who favoured large public works programs in February 1929, and so the Treasury fought both these proposals and those of Keynes and Lloyd George (Skidelsky 1992: 299). Keynes attacked the “Treasury View” in an unsigned article in the Nation of 23 February 1929 called “The Objections to Capital Expenditure” (Skidelsky 1992: 299). Keynes identified two “leakages” of savings which caused disequilibrium between savings and investment, as follows:

(1) leakage of savings into financial asset markets (that is, the stock, share and bond markets) where this money is not spent on real capital investment, and

(2) leakage of savings overseas into foreign investments (Skidelsky 1992: 299).

Keynes maintained that therefore there were savings available in Britain for deficit-financed public works programs (Skidelsky 1992: 301). Winston Churchill, as Chancellor of the Exchequer, also defended the Treasury view in his budget speech of 15 April 1929 (Moggridge 1992: 462).

On 10 May 1929, Hubert Henderson and Keynes published Can Lloyd George do it?, a pamphlet in support of Lloyd George before the UK general election of 1929. In this pamphlet, Keynes and Henderson pointed to the “cumulative force of trade activity” as a further argument in favour of deficit spending, and this eventually inspired the concept of the “multiplier” formulated by Richard Kahn in the summer of 1930 (Moggridge 1992: 464).

In the UK general election of 30 May 1929, Keynes expected the Liberal party to do well in the election and win at least 100 seats (Skidelsky 1992: 306), but the results, summarised below, disappointed him:

Party | Leader | Seats Won
Conservative | Stanley Baldwin | 260
Labour | Ramsay MacDonald | 287
Liberal | David Lloyd George | 59.

The UK Labour Party under Ramsay MacDonald won 287 seats, and formed a government, with Ramsay MacDonald as British Prime Minister from 5 June 1929–7 June 1935, but proved disastrously inept and stupid, as it supported austerity when the Great Depression hit Britain.

Keynes was so disappointed that he never attended a Liberal Summer School event ever again (Moggridge 1992: 464).

June to December 1929
Since summer 1924, Keynes had been occupied in writing A Treatise on Money, and his work continued into the summer of 1928 and 1929. With his Easter teaching term over at the end of June 1929, Keynes returned in summer to working on the Treatise on Money. Keynes spent much of the summer at his house in Tilton, South Downs near Lewes, and engaged in writing his Treatise (Skidelsky 1992: 338).

Keynes had taken possession of Tilton house on 3 March 1926, rented on a 21 year lease (Skidelsky 1992: 214). It was in Tilton house that Keynes and his wife Lydia would spend their Christmas and Easter holidays and two and a half months during the summer (Skidelsky 1992: 217).

From 19 to 29 July 1929, Keynes travelled to Geneva, where he gave four lectures at the School of International Studies (Moggridge 1992: 479), having been invited by the Financial Section of the League of Nations (Skidelsky 1992: 338). He and his wife Lydia then had a holiday in Burgundy in August (Skidelsky 1992: 338).

After his return to Britain during summer, Keynes had an active social life, and he appears to have taken part in a BBC broadcast, a dinner with Lloyd George at his house in Churt, and a meeting with Oswald Mosley (the new Chancellor of the Duchy of Lancaster). This was long before Oswald Mosley became a fascist, and at this time Mosley was a rising figure in the British Labour Party (which he had joined in March 1924), and a Member of Parliament for Smethwick (21 December 1926–27 October 1931). In 1929, Mosley was appointed by Ramsey MacDonald to the position of Chancellor of the Duchy of Lancaster (a post without Portfolio and outside the Cabinet), but was tasked with solving the unemployment problem in Britain, which had been high since the early 1920s. On 4 September 1929, Keynes met Mosley in London and discussed the problem of unemployment (Skidelsky 1992: 339).

In August, Keynes decided that many chapters of A Treatise on Money needed to be re-written and he also decided to divide the work into two volumes (Moggridge 1992: 479). In mid-November, Keynes allowed Arthur Pigou and Dennis Robertson to read and comment on his new draft of the Treatise (Moggridge 1992: 480). However, it was not until the next year that Keynes’ A Treatise on Money was published, on 24 October 1930.

Before August 1929, Richard Kahn, who was Keynes’ student, also began to assist Keynes in the development of his thinking on economics (Moggridge 1992: 480). Moreover, it was in October 1929 that Joan Robinson and Austin Robinson returned to Cambridge, and from 1929 to 1930 Joan Robinson attended Piero Sraffa’s lectures (Sraffa had arrived in London in July 1927 after fleeing Italy).

Keynes did not predict, or foresee, the Great Depression of 1929–1933 (Moggridge 1992: 478; Skidelsky 1992: 338).

It was in October that two severe corrections hit the New York stock exchange, as follows:

24 October 1929 – “Black Thursday” on the New York stock exchange, the beginning of the US Stock Market Crash of 1929

29 October 1929 – “Black Tuesday” on the New York stock exchange.

When the first Wall Street Crash occurred on 24 October 1929, Keynes was surprised. Indeed, in an article in the New York Evening Post, Keynes appeared to think that monetary policy would eventually correct the problem (Moggridge 1992: 480).

Keynes’ investments also suffered heavily from falling stock and commodity prices, so that by late 1929 his new worth dropped from £44,000 to £7,814 (Skidelsky 1992: 342).

On the 5 November 1929, the UK Treasury created a “Committee on Finance and Industry,” chaired by Lord Macmillan (and therefore called the “Macmillan Committee”), to which Keynes was appointed, and its first meeting was on 21 November 1929 (Moggridge 1992: 481). This committee was an inquiry into banking and finance, amongst other things. Keynes even met Ramsey MacDonald, the British Prime Minister, on the 25 November, the 9 December and 16 December, to discuss economic issues (Moggridge 1992: 481).

Later on 24 January 1930, the British government established an “Economic Advisory Council (EAC),” chaired by the Prime Minister, which included the Chancellor of the Exchequer, the President of the Board of Trade, the Minister of Agriculture, Hubert Henderson (as senior economist), and Keynes, amongst others (Moggridge 1992: 481–482).

Keynes was now a government adviser, and he had to attend sixty-five meetings related to these committees between November 1929 and September 1930 (Moggridge 1992: 482). Keynes was especially active in the Macmillan Committee (which included Ernest Bevin), both in the examination of witnesses and in the production of the final report (Skidelsky 1992: 345).

From 1929 to 1931, Keynes lost interest in the now small Liberal Party and its politics (Skidelsky 1992: 344).

Keynes gave the Ludwig Mond Lecture at Manchester University on 7 November 1929, and noted the relative rigidity of money wages, and particularly how money wages were determined by “social and historical forces,” and not by marginal labour productivity (Skidelsky 1992: 347).

In December 1929, Richard Kahn, Keynes’ student, submitted his dissertation called “The Economics of the Short Period,” and Kahn became a Fellow at King’s College in March 1930 (Moggridge 1992: 480).

BIBLIOGRAPHY
Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Austerity in Pre-1938 Fascist Austria

From 1933 to 11 March 1938, Austria was ruled by the clerical fascist Fatherland Front in a regime called the Austrian Federal State.

The two dictators of Austria in this period were as follows:

Dictators of the Austrian Federal State
5 March 1933–25 July 1934 – Engelbert Dollfuss
29 July 1934–11 March 1938 – Kurt Schuschnigg

Although the Fatherland Front had some anti-capitalist elements, the fact is that in power Engelbert Dollfuss and Kurt Schuschnigg pursued spending cuts, austerity, budget balancing and wage and price deflation.

In this period, Ludwig von Mises had a fascinating relationship with the clerical Austro-fascist regime.

Already around 1930, before the Austrian fascists seized power, Mises joined an Austrian government economic commission to study the causes of the depression in Austria, along with (interestingly enough) the future Austro-fascist leader Engelbert Dollfuss (Hülsmann 2007: 614), to whom Mises was later to give economic advice. The report of the committee blamed (1) inflationary expectations in Austria and (2) rises in taxation and government spending and increased wage rates (which had all squeezed business profits) for the inability of Austria to attract foreign capital needed to facilitate quicker adjustment and recovery from the depression (Hülsmann 2007: 614–615).

On February 28, 1931, Mises gave a lecture called “The Causes of the World Economic Crisis” in Czechoslovakia (Mises 2006 [1931]), and, as a remedy for the depression, Mises advocated eliminating unemployment relief (presumably forcing the unemployed to starve and accept lower wages), cutting government spending and taxes (Mises 2006 [1931]: 175), not only to cut wages, but also to make wage determination free from labour unions (Mises 2006 [1931]: 169).

Hans-Hermann Hoppe (an Austrian economist) relates that Mises was later a close adviser of Dollfuss:

“Engelbert Dollfuss [sc. was] ... the Austrian Chancellor who tried to prevent the Nazis from taking over Austria. During this period Mises was chief economist for the Austrian Chamber of Commerce. Before Dollfuss was murdered for his politics, Mises was one of his closest advisers.”
Hans-Hermann Hoppe, “The Meaning of the Mises Papers,” April 1997
https://mises.org/library/meaning-mises-papers

Even after his move to Geneva in 1934, Mises was still employed by the Austrian government, visited Austria periodically, and continued to do work for the government (Hülsmann 2007: 884). And, as late as February 1938, the Austro-fascist regime of Schuschnigg asked Mises to become Chief of the Department for Monetary and Financial Affairs, and Mises came to Vienna to discuss this offer in February 1938 as well (Hülsmann: 2007: 723).

The clerical fascist pursued many of the policies Mises had advocated:

“In tackling the economic crisis the Dollfuss-Schuschnigg dictatorship pursued harsh deflationary policies designed to balance the budget and stabilize the currency. The government’s program featured severe spending cuts, high interest rates, and frozen wages. …. In a sense the Christian Corporative regime demonstrated the viability of the Austrian state, but it did so at the cost of alienating a majority of the Austrian people. On the eve of Anschluss a third of the population was still out of work, while those fortunate enough to have jobs were bringing home paychecks considerably smaller than before the Great War” (Bukey 2000: 17).

“Beginning in in 1931, [Austrian] unemployment grew rapidly, reaching a peak in 1933–6, with between 24 and 26 per cent of the labour force out of work .... When, in 1937 and 1938, there was a modest recovery, unemployment never dropped below the 20 per cent value. This had a devastating effect on the legitimacy of the Austrian system .... As the Austrian government sustained its reluctance to apply Keynesian policies, the economic recovery never entered a serious tale-off phase in the second half of the 1930s. Linked to an exhausted determination of the Austrian government to resist the pressures from Germany, the economic crisis of the 1930s should be seen as an additional reason why the Austrian society was receptive to the annexation by Germany in March 1938” (Gerlich and Campbell 2000: 55).

The Austrian clerical fascists also smashed trade unions and banned the Social Democratic party.

We can see the spending cuts and attempts to balance the budget in the graph below of budget deficits in pre-1938 Austria from 1934–1938 in millions of schillings (data from Fibich 1977: 170 ff.; to get a high quality version of the graph, click on it or open it in another tab).



As we can see, the budget deficit was radically cut right down until 1936, and was virtually eliminated, since by October 1936 the budget deficit was about 0.5% of GDP (Berger 2003: 90).

Some of the austerity policies included:

(1) the elimination of the works council in 1934;

(2) a series of cuts to welfare, and

(3) slashing of unemployment benefits to the point where only 50% of the unemployed in 1936 received benefits (Obinger 2018: 86).

How did the economy perform under this austerity?

The Austrian economy was awful.

Real GNP growth was mostly feeble in the 1930s in the years after the actual contraction ended as we can see here:

Real GDP in Austria 1928–1938
Year | GNP* | Growth Rate
* in millions of international Geary-Khamis dollars
1928 | 24 295 | 4.64%
1929 | 24 647 | 1.44%
1930 | 23 967 | -2.75%
1931 | 22 044 | -8.02%
1932 | 19 769 | -10.32%
1933 | 19 113 | -3.31%
1934 | 19 277 | 0.85%
1935 | 19 652 | 1.94%
1936 | 20 238 | 2.98%
1937 | 21 317 | 5.33%
1938 | 24 037 | 12.75%
(Maddison 2003: 50).

In fact, by 1937 real GDP had still not recovered to its 1929 level.

Austrian unemployment was also a disaster. There are two estimates of Austrian unemployment I have found: Maddison (1982: 206, Table C6) and Stiefel (1979: 29), but I would assume that Stiefel’s estimates are better, given that he is an Austrian scholar and his estimates are cited in Emmerich Tálos’s Das austrofaschistische Herrschaftssystem: Österreich 1933–1938 [The Austro-Fascist Regime: Austria 1933–1938] (2nd edn. 2013, Vienna; p. 330, Tabelle 1).

We can see the two estimates of Austrian unemployment in the 1930s in the graph below (to get a high quality version of the graph, click on it or open it in another tab):



As we can see, unemployment soared to high levels by 1933, and remained stubbornly high until 1937, by either measure.

History also ran a most fascinating experiment for us from 1933 to 1939.

While in Austria, the clerical fascists pursued austerity and wage and price deflation from 1934 to 1937, in Germany the National Socialist government of Hitler implemented a series of economic interventions that involved large government deficits, direct public works programs, and rearmament. This program was undoubtedly Keynesian in its fiscal effects, despite some modern attempts to deny this like Tooze (2008) (on the simulative nature of Germany’s deficits and policies after 1933, see Cohn 1992; Fremdling and Stäglin 2015; Overy 1996). The fact that German military spending was higher by 1935 than some historians have thought does not change the reality that military Keynesianism is still Keynesianism. It is clear that German policy down to 1936 was a mix of military and civilian Keynesian spending.

So how did Austrian unemployment compare to unemployment in Germany?

We can see this in the graph below (with German unemployment rate from Mitchell 1992: p. 160 and 163, B2, and Austrian unemployment from Stiefel 1979: 29; to get a high quality version of the graph, click on it or open it in another tab):

While Austrian unemployment remained high, German unemployment fell rapidly.

Popular support for the Austro-fascist regime collapsed by 1938 given the economic disasters and high unemployment, and when Hitler annexed Austria in March 1938 there was no doubt a great deal of support for the Anschluss within Austria.

Paradoxically, Mises – even though he declared that Italian fascism “saved European civilisation” from Communism (Mises 1978: 51) – had a real role in killing Austrian fascism through his policy advice to pursue austerity and wage and price deflation, which failed to induce any real recovery from the high unemployment.

I have rarely seen Austrians and other libertarian supporters of Mises address the question of why their cult leader’s austerity policies failed so miserably to produce any serious recovery in Austria.

BIBLIOGRAPHY
Berger, Peter. 2003. “The League of Nations and Interwar Austria: Critical Assessment of a Partnership in Economic Reconstruction,” Günter Bischof, Anton Pelinka, Alexander Lassner (eds.), The Dollfuss/Schuschnigg Era in Austria: A Reassessment. Transaction Publishers, New Brunswick, N.J. 73–92.

Bukey, E. B. 2000. Hitler’s Austria: Popular Sentiment in the Nazi Era, 1938–1945. University of North Carolina Press, Chapel Hill, North Carolina.

Cohn, R. L. 1992. “Fiscal Policy in Germany during the Great Depression,” Explorations in Economic History 29: 318–342.

Fibich, Alexander. 1977. Die Entwicklung der österreichischen Bundesausgaben in der Ersten Republik (1918–1938). Dissertation, Wien.

Fremdling, Rainer and Reiner Stäglin. 2015. “Work Creation and Rearmament in Germany 1933–1938: A Revisionist Assessment of NS-Economic Policy Based on Input-Output Analysis,” IDEAS Working Paper Series, Discussion Papers 1473
https://www.diw.de/documents/publikationen/73/diw_01.c.502764.de/dp1473.pdf

Gerlich, P. and D. Campbell, 2000. “Austria: From Compromise to Authoritarianism,” in D. Berg-Schlosser and J. Mitchell (eds). The Conditions of Democracy in Europe, 1919–39: Systematic Case Studies. Macmillan, Basingstoke. 40–58.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.

Maddison, Angus. 1982. Phases of Capitalist Development. Oxford University Press, Oxford.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Mises, Ludwig von. 1978 [1927]. Liberalism: A Socio-Economic Exposition (2nd edn; trans. R. Raico). Sheed Andrews and McMeel, Mission, Kansas.

Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.

Mitchell, Brian R. 1992. International Historical Statistics: Europe 1750–1988 (3rd edn.). Stockton Press, New York.

Obinger, Herbert. 2018. “War Preparation, Warfare, and the Welfare State in Austria,” in Herbert Obinger, Klaus Petersen and Peter Starke (eds.), Warfare and Welfare: Military Conflict and Welfare State Development in Western Countries. Oxford University Press, Oxford. 67–98.

Overy, Richard James. 1996. The Nazi Economic Recovery, 1932–1938 (2nd edn.). Cambridge University Press, Cambridge.

Stiefel, Dieter. 1979. Arbeitslosigkeit: soziale, politische und wirtschaftliche Auswirkungen – am Beispiel Österreichs 1918–1938. Duncker & Humblot, Berlin.

Tálos, Emmerich. 2013. Das austrofaschistische Herrschaftssystem: Österreich 1933–1938 (2nd edn.). Lit Verlag, Vienna.

Tooze, Adam. 2008. The Wages of Destruction: The Making and Breaking of the Nazi Economy. Penguin, London and New York.

Stefan Molyneux’s Libertarian Myths on the Great Depression

These myths can be seen in the video below of Stefan Molyneux’s interview of Lawrence W. Reed on the Great Depression.



A quick point that struck me: both seem oblivious to the fact that Keynesian economists do not advocate tax increases in a recession or depression. This doesn’t inspire much confidence in the quality of the analysis.

In what follows, I am using a Post Keynesian economic analysis to critique the economic theory underlying the discussion in this video, which seems to be some version of Austrian economics.

But let’s break down the libertarian propaganda and nonsense:

(1) yes, it is true that the Federal Reverse helped to blow the US asset bubble in the stock market in the 1920s by loose monetary policy, and to that extent helped cause the crisis.

But this was all in the context of a poorly regulated financial sector, and the truth is that asset bubbles are also endemic to laissez faire capitalism even in the absence of central banks. To see this, just look at the asset bubbles in America in the 19th century when (for most of the century) no US central bank existed. For example, devastating manufacturing recessions happened in the 19th century after US asset bubbles and financial crises, as in the 1870s and 1890s (e.g., see here).

Or take a look at Australia in the 1880s and 1890s, where a very poorly regulated financial sector and foreign capital inflow caused a massive asset bubble and financial crisis, which then induced a severe depression in the 1890s (here and here). Australia had no central bank at this time, was on a gold standard, and had virtually no banking regulation.

The more laissez faire capitalism is, the more prone to destabilising debt-financed asset bubbles and economic crises it is. The solution is not abolishing central banks (which are absolutely necessary for stabilising the fractional reserve banking system), but vigorous financial regulation to choke off the flow of credit to asset speculators on the secondary financial asset and secondary real asset markets.

Central banks and effective financial regulation largely cured capitalism of destabilising asset bubbles in the golden age of Keynesianism from the 1940s to the 1970s, and provided a degree of banking stability that can be seen here.

(2) Molyneux and Reed push the discredited Wicksellian loanable funds model of investment, which has long been used by Austrians in a crude form (for loanable funds see here). You cannot accurately model the level of aggregate investment in a capitalist society by the loanable funds model, which is hopelessly flawed by the empirical irrelevance of the natural rate of interest and complicating role of uncertainty and business expectations. The neoclassical version of the natural rate requires the Efficient Markets Hypothesis (EHM), which is a theory that belongs in Cloud Cuckoo Land (here).

The role of interest rates in determining investment is overrated at the best of times, and in times of crisis grossly overrated to the point of absurdity (see the devastating empirical evidence here).

Underlying this libertarian theology is the belief that fractional reserve banking and credit money are somehow alien to and fraudulent violations of laissez faire capitalism, which is total nonsense.

(3) Molyneux pushes some vulgar version of Austrian Business Cycle Theory (ABCT), but that theory can easily be totally debunked (see here, here, here, here, here).

(4) at 7.00, we get the typical libertarian nonsense about the US recession of 1920–1921, which is completely debunked here.

(5) Reed, quite laughably, admits that the liquidationist solution of Austrian economics (letting the money supply collapse) to the Great Depression was a bad idea, and proceeds to blame the Federal Reserve from 1929 to 1933 for letting the money supply collapse: so here the Fed is blamed for not engaging in evil intervention!

(6) Molyneux’s ranting (from 13.20 onwards) about central banks giving “free money” is rubbish. The banks created massive private debt (with an endogenous money accommodating their demand for reserves), not free money.

(7) Reed plunges into all sorts of libertarian myths about Herbert Hoover. The Smoot Hawley tariff was not a major cause of America’s Great Depression. Certainly, it hurt other countries, but one cannot invoke this as a fundamental cause of America’s depression.

Fundamentally, the fall in export demand caused by the Smoot Hawley tariff was offset by a rise in domestic demand, so that, as Temin argues, the net contractionary effect on the US domestic economy was probably small (Temin 1989: 46).

While Hoover did intervene in the economy in certain ways, this intervention was not the cause of the Great Depression either.

It is indeed true that Hoover was not, strictly speaking, a liquidationist, and attempted to fight the onset of the Great Depression with a number of limited interventions, but these were all ridiculously feeble and too small given the scale of the GDP collapse.

Some of Hoover’s actions was positively harmful, and clearly not in line with Keynesian economics:

(1) In fiscal year 1930, Hoover actually ran a federal budget surplus, not a deficit. Federal policy was contractionary in this fiscal year.

(2) The Federal Reserve raised the discount rate in 1931.

(3) In fiscal year 1933, total federal spending was cut in relation to fiscal year 1932. Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years. These were contractionary measures, and these two policies are the very antithesis of Keynesian stimulus.

Regarding Hoover’s idea of maintaining high wages, he was not simply forcing this policy on huge numbers of unwilling corporate leaders: first, it was mostly a voluntary policy and, secondly, the idea had permeated the corporatist thinking of many business people in the 1920s.

Many influential industrialists actually supported it; Hoover was basically articulating an influential opinion they already held, and whatever harm it did as prices fell, one must blame the private sector just as much as Hoover (see here).

On Hoover, see here, here, here, here, here, here, here.

(8) That claim that the Depression was “prolonged” under Roosevelt from 1933 to 1937 (before Roosevelt’s turn to austerity) is nonsense. Under Roosevelt real GDP growth rates recovered to a very great extent.

Here is real GNP in billions of chained 2005 Dollars from U.S. Department of Commerce data:

Year | GNP* | Growth Rate
1929 | $984.60
1930 | $900.00 | -8.59%
1931 | $840.70 | -6.58%
1932 | $730.50 | -13.10%
1933 | $720.30 | -1.39%
1934 | $797.70 | 10.74%
1935 | $868.90 | 8.92%
1936 | $981.10 | 12.91%
1937 | $1032.50 | 5.23%
1938 | $997.40 | -3.39%
1939 | $1077.80 | 8.06%
1940 | $1170.80 | 8.62%
* Billions of chained 2005 Dollars

http://wikiposit.org/a?uid=FRED.GNPCA

In reality, the average annual real GDP growth rate from 1934 to 1940 was 6.511%, the second highest average growth rate ever seen amongst all coherent and historically relevant periods in modern American history here.

We can see the very significant fall in unemployment under Roosevelt here. When Roosevelt turned to budget balancing and austerity in 1937–1938, the US plunged back into recession and sharply rising unemployment. This blatantly contradicts Austrian and libertarian myths about the benefits of austerity.

(9) It is true that there were destructive aspects to the New Deal, such as the National Industrial Recovery Act (NIRA), which even John Maynard Keynes condemned (see here). But it is important to remember the thinking behind some of these New Deal Programs: America’s price system had become grossly distorted by the disparity between relatively inflexible cost-based mark-up prices and the collapse of flexprices (often in primary industries). See this post here. As Keynes argued, the National Industrial Recovery Act (NIRA) should never have been done, and agricultural prices increased by stimulus of aggregate demand (perhaps even with temporary subsidies to farmers as well).

(10) The Wagner Act (or National Labor Relations Act of 1935) was not a fundamental cause of the US recession of 1937 to 1938, which was caused by Roosevelt’s budget balancing, austerity, monetary tightening and Roosevelt’s tax hikes of 1936 to 1937, namely, the undistributed profits tax (March 1936), and Social Security payroll tax (1937).

(11) Unsurprisingly, Molyneux and Reed never bother to look outside the United States at depression history. Those nations that recovered from the Great Depression or its aftermath rapidly and successfully – New Zealand, Japan and Germany – used large-scale Keynesian fiscal stimulus:

“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.

But of course this doesn’t fit the libertarian narrative.

Nor is the disastrous failure of austerity in 1930s Austria or Weimar Germany mentioned:

“Liquidationism and early 1930s Germany: Not a Good Mix!, August 15, 2014.

“Keynesianism could probably have prevented World War II,” January 15, 2016.

“Mises and the Great Depression in Austria,” May 12, 2014.

(12) The recovery in the US economy by 1940 was very real, despite the implied nonsense in his video that no recovery occurred, even if it was not complete.

Furthermore, there was a sense in which the Second World War did aid and complete the recovery as described here, but the war was hardly necessary for this.

(13) regarding the post-WWII boom in America, a number of Keynesian economists did not predict long-term unemployment or stagnation after the post-war correction, contrary to Reed (see here and here), and even Paul Samuelson’s views on the post-WWII economy have been reduced to a caricature by libertarians (see here).

Moreover, government interventions did prevent US mass unemployment by means of the G.I. Bill of 1944.

BIBLIOGRAPHY
Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.

Barry Eichengreen on the Great Depression and the Great Recession

Barry Eichengreen speaks about his new book Hall of Mirrors: The Great Depression, the Great Recession and the Uses—and Misuses—of History (OUP USA, 2015). He also makes some interesting comments on the Eurozone early in the interview: the fetters of the Eurozone are worse than the gold standard!

Marcello de Cecco on the Great Depression and the International Monetary System

Marcello de Cecco, an economic historian, is interviewed here on the international monetary system during the Great Depression.

“Regime Uncertainty”: The Austrian Poor Man’s Version of Fundamental Uncertainty

The Austrian and libertarian concept of “regime uncertainty,” coined by the libertarian Robert Higgs (1997), is described here:

Regime Uncertainty, http://wiki.mises.org/wiki/Regime_uncertainty

The problem with this concept is that it is a ridiculously one-sided and misleading take on fundamental uncertainty.

“Uncertainty” in the sense used here is uncertainty that cannot be objectively quantified and might come in various qualitative degrees, from total uncertainty to some low degree of uncertainty, to which economic agents are subject and which affects their expectations and decision-making, and above all the decision to invest.

Of course, it is perfectly possible for governments to create uncertainty, but it is just as possible for them to reduce uncertainty as well. Above all, the private sector itself and the unintended consequences of decision-making by millions of private agents can create uncertainty – and often severe uncertainty too. Conditions in the private sector during the US Great Depression – such as falling demand, falling asset markets, deflation, debt deflation, and banking and financial instability – especially in its contractionary phase (1929–1933) were a great source of business uncertainty which also persisted after 1933. Any analysis of the 1930s that ignores this is fundamentally flawed.

It speaks volumes that libertarians want to limit uncertainty to that caused by the government, and the weakness in their use of “regime uncertainty” can be seen in the way they apply it to the Great Depression (e.g., Higgs 1997; Woods 2004: 149; Murphy 2009: 113–118).

Here is a typical statement by Thomas E. Woods:

“Economic historian Robert Higgs has argued that ‘regime uncertainty’ also hindered recovery. Businessmen and investors, unsure of what the federal government would do next and what additional punitive measure would be imposed on them, simply stopped investing.” (Woods 2004: 149).

The claim that US businessmen and investors “simply stopped investing” in the 1930s under Roosevelt is a bold one, but, as we will see, is utterly untrue.

In essence, the libertarians want to blame the US government for the failure of the US economy to recover to full employment after 1933: according to the libertarian view, private capitalists did not want to invest, and this was either wholly or mainly the fault of government deficit spending, regulations, anti-business court decisions, pro-union policies, and so on.

Now, while some of the government interventions under Roosevelt probably did have negative effects on business expectations in the 1930s, and indeed Keynes himself pointed to some of the unproductive aspects of the New Deal (Skidelsky 1992: 508), nevertheless that effect is grossly exaggerated.

What is the evidence for this? We need only look at an index of US private investment in the 1930s, as below (with data from Amaral and MacGee 2002: 48, Table I).

The data can also be seen below in Appendix 1.

As we can see, as Roosevelt come into office and deficit spending and regulations were increased, US private investment actually recovered and was rising to such an extent that by 1937 it had risen from 21.8 to 59.5. It is plainly nonsensical to say that US businesses and investors “simply stopped investing” under Roosevelt. If that were true, then we would see a flat or falling line in the graph above in the period after 1933.

And even under the preferred libertarian measure of net investment (adjusted for capital consumption allowance), US investment was positive in 1936 and 1937 and after the resumption in fiscal stimulus after 1938 (Higgs 2006: 7). It is true that it was negative in 1934 and 1935, but even that does not change that fact that gross investment started rising from 1933 and continued rising until 1937.

Unfortunately, it was in 1937 that Roosevelt, instead of pursuing continuing fiscal stimulus or (better still) increased stimulus, turned to budget balancing and contractionary fiscal and monetary policy, and the result was that he induced a second recession from 1937 to 1938 (the so-called “Roosevelt recession”).

The result was that US gross and net private investment fell in 1938. It then resumed growth after 1938 when Roosevelt shifted back to expansionary fiscal policy.

The actual data shows the opposite of what we would expect if the private sector was really “uncertain” and totally or largely unwilling to invest when the government was engaged in deficit spending and other interventions.

Moreover, as is well known, although intense business opposition to the New Deal existed, it was restricted to certain sectors, and many other elements of American business were strong supporters of New Deal programs:

“While encouraging the growth of big labor and ministering to the needs of the elderly and the poor, the New Deal also provided substantial benefits to American capitalists. Business opposition to Roosevelt was intense, but it was narrowly based in labor-intensive corporations in textiles, automobiles, and steel, which had the most to lose from collective bargaining. The New Deal found many business allies among firms in the growing service industries of banking, insurance, and stock brokerage where government regulations promised to reduce cutthroat competition and to weed out marginal operators. Because of its aggressive policies to expand American exports and investment opportunities abroad, the New Deal also drew support from high-technology firms and from the large oil companies who were eager to penetrate the British monopoly in the Middle East. Sophisticated businessmen discovered that they could live comfortably in a world of government regulation. The ‘socialistic’ Tennessee Valley Authority lowered the profits of a few utility companies, but cheap electric power for the rural South translated into larger consumer markets for the manufacturers of generators, refrigerators, and other appliances.” (Levy et al. 1986: 447–448).

And even in those sectors where opposition to the New Deal was strong, there is still little evidence that these industries refused to do business or increase investment when the fiscal effects of the New Deal caused demand for their output to rise.

In short, “regime uncertainty” as the main explanation of why the US failed to achieve full employment under Roosevelt is just ideological libertarian nonsense.

Update
A commentator below asks the following question:

“Lord Keynes, why use yearly data if there’s monthly data available? The Fed’s Index of Industrial Production (not exactly investment, but correlated enough with it) shows a sharp and sudden spike in industrial production from April to July of 1933, and then stagnation for two whole years.”

The answer is that private investment is an important metric and one chosen by the Austrians and libertarians themselves in their attempts to spin their stories about “regime uncertainty.” As we have seen, the evidence does not support them.

But what about the Federal Reserve’s index of US industrial production?

We can see a graph of the Fed’s index of US industrial production below from 1928 to 1941 (the seasonally adjusted data can be seen here).

And for clarity a graph of the 1933 to 1937 period.

It is true that there were two curious periods in 1933 and 1934 when industrial production contracted.

From April to July 1933, a strong expansion in output occurred. But this was derailed from August to November 1933 as industrial output fell.

However, output rose again from December 1933 until May 1934, but then fell again from June down to September 1934.

From October 1934, there began a clear upwards trend and expansion – apart from a few months of flat growth in early 1935 and a few months of contraction late in 1936 – that continued right up until the middle of 1937, at which point Roosevelt’s austerity induced a second recession.

The Fed’s index of US industrial production shows us a clear trend of recovery in industrial output from October 1934 right up until Roosevelt’s fiscal and monetary contraction.

From August 1933 until September 1934 it is true that there were two periods of contraction in industrial output. Exactly why this happened is an open question, but at the same time industrial output fell in these periods, annual gross private investment was still rising, and overall the long-run trend in the data from 1933 until 1937 – whether real GDP, industrial output, private investment, or unemployment – shows a recovery, not stagnation or contraction.

In fact, in December 1936, industrial output (at 8.0522 in that month) surpassed its 1929 peak (which was 7.918).

Moreover, when Roosevelt’s fiscal expansion was resumed in 1939, industrial output, as we can see in the first graph, continued to strongly recover – utterly contradicting the Austrian/libertarian narrative.

Appendix 1
US Private Investment 1929–1939
Year | Index
1929 | 100
1930 | 69.2
1931 | 46.1
1932 | 22.2
1933 | 21.8
1934 | 27.9
1935 | 41.7
1936 | 52.6
1937 | 59.5
1938 | 38.6
1939 | 49

BIBLIOGRAPHY
Amaral, P. and J. MacGee. 2002. “The Great Depression in Canada and the United States: A Neoclassical Perspective,” Review of Economic Dynamics 5.1: 45–72.

Higgs, Robert. 1997. “Regime Uncertainty: Why the Great Depression lasted so Long and Why Prosperity returned after the War,” Independent Review 1 (Spring): 561–590.

Higgs, Robert. 2006. Depression, War, and Cold War: Studies in Political Economy. Oxford University Press, Oxford.

Higgs, Robert. 2011. “The Sources of New Deal Regime Uncertainty,” Mises Daily, May 23
http://mises.org/daily/5271/The-Sources-of-New-Deal-Regime-Uncertainty

Levy, L. W. et al. (eds), Encyclopedia of the American Constitution (vol. 1), Macmillan, New York.

Murphy, Robert. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal. Regnery Publishing, Inc. Washington, DC.

Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour, 1920–1937 (vol. 2), Macmillan, London.

Woods, Thomas E. 2004. The Politically Incorrect Guide to American History. Regnery Publishing, New York.

Salerno’s Response to Krugman on Mises and the Great Depression

Salerno’s recent response to Krugman is here:

Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014
http://bastiat.mises.org/2014/01/paul-krugman-attacks-ludwig-von-mises-another-win-for-austrian-economics/

Salerno’s post is unintentionally hilarious, given the quotation that opens his post (comparing the righteous and poor persecuted Austrians with Gandhi!):

“First they ignore you, then they laugh at you, then they fight you, then you win.”

(Mahatma Gandhi).

Funny you use that quote, Salerno, because it would appear to be a perfect description of how you (and other Austrians) treatment me and my blog.

First of all, arguments stand and fall on their own merits, not on the obscurity or identity of the author. But it appears Salerno doesn’t agree with that and resorts to exactly the tactics described above.

Salerno says the following of my post here:

“Actually, our jaded scribe [sc., Krugman] could not be bothered to train his sites on Mises’s actual views but rather rests content to attack a caricature of Mises’s position as presented in a pseudonymous post by an individual calling himself ‘Lord Keynes’ on the blog Social Democracy for the 21st Century: A Post Keynesian Perspective. Blithely accepting ‘Lord Keynes’s’ claims at face value, Krugman declares ‘von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.’”
Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014
http://bastiat.mises.org/2014/01/paul-krugman-attacks-ludwig-von-mises-another-win-for-austrian-economics/

No, Salerno, I did not say that “von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.”
Here is what I said (with my quotation from Mises following):

“However, it is interesting that Mises thought that his Austrian monetary theory of the cycle could not adequately explain the severity and length of the Great Depression (as also noted by Hülsmann 2007: 617–618):

“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings. The most recent boom period did not run its course completely, at least not in Europe. Some countries and some branches of production were not generally or very seriously affected by the upswing which, in many lands, was quite turbulent. A bit of the previous depression continued, even into the upswing. On that account—in line with our theory and on the basis of past experience—one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.

The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.” (Mises 2006 [1931]: 163–164).

So it appears that Salerno either (1) did not read the post or (2) did not read it properly or ignored what I actually said. Since Salerno later repeats one of my quotations from Mises, it would appear to be (2).

But if Salerno did not read the post properly or “ignored” what I said, then Salerno appears to have fulfilled the first of these failings of his quotation (“First they ignore you, then they laugh at you, then they fight you, then you win”).

It also follows that Salerno’s charge that my post was “a caricature of Mises’s position” is a straw man, though perhaps unintentionally.

This is reinforced when Salerno borrows a quotation of mine from Mises and uses it to prove that “Mises did not deny that the Great Depression was initiated by credit expansion.” That is correct, but then I did not assert that Mises abandoned his business cycle theory.

Salerno’s following charge that Krugman is unable “to grasp a multi-causal explanation of a complex and multifaceted historical episode” that was the Great Depression is so stupid, it’s laughable, and is actually more appropriate for the grossly oversimplistic explanation of Mises himself, who ignored the complex factors in the 1930s that thwarted any strong inducement to hire labour and clear the labour market via lower wages, such as the level of demand for output, the degree of uncertainty of capitalists about the future, business expectations, the general state of expectations, and the state of the financial system and credit markets, and so on.

After this Salerno links to a paper by Ohanian (2009) arguing that Hoover’s “high wage” policy was a major cause of the US depression, which is rather strange because Mises was talking about the Great Depression in Europe, not the United States.

Be that as it may, it is clear that, firstly, Hoover’s “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with. But secondly and more importantly, Jonathan D. Rose (2010) presents some evidence that Hoover’s “high wage” policy actually did not have much effect on the timing of US wage cuts during the depression.

Thirdly, even when wages fell, this induced severe debt deflationary effects, because price deflation was quite uneven, and the burden of fixed nominal debt soared. So the smooth and rapid market clearing as postulated by Mises as the cure for high involuntary unemployment simply could not and did not happen.

Next, Salerno admonishes Krugman to “stop trawling obscure blogs for biased material” on Austrians – referring to my blog.

This seems like a rather good example of the second part of Salerno’s opening quote (“First they ignore you, then they laugh at you, then they fight you, then you win.”).

Even the charge that my blog is “obscure” (though irrelevant) is, I think, wrong. I’ve made it into the Onalytica Influence Index’s “Top 200 Influential Economics Blogs” (August 2013). Even though I am at no. 178 (at the moment), there are thousands of economics blogs all over the internet, so I’m not quite so “obscure” as Salerno thinks.

And, in point of fact, Robert Murphy seems to have already moved onto the third stage (“fighting” me): he promised here to respond in greater detail to me later this week. I look forward to that.

Finally, Salerno’s links to his paper “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” in his attempts to provide Krugman with “an honest and accurate account of the Austrian theory.”

That is priceless, because a “reformulation” implies that there was something inadequate about the original theory, which does not say much for the ABCT if it needs to be regularly reformulated.

I would go so far as to say that the Austrian business cycle theory is a sad history of “reformulations” as Austrians encountered severe and cutting criticisms of their theory.

For example, Hayek’s first version of the ABCT in Prices and Production (London, 1931) encountered devastating criticisms from Sraffa (1932a, 1932b) and others and he was forced to “reformulate” the theory in Profits, Interest and Investment (London, 1939).

If we turn to Salerno’s new ABCT, one of the main purposes of his paper is to address the criticism that the ABCT “cannot explain the positive correlation of consumption and investment that occurs over the course of the business cycle” (Salerno 2012: 5). But such a charge against the ABCT is only one of the minor problems with the theory.

The main problem with the classic ABCT was always its use of the Wicksellian natural rate of interest: an irrelevant and non-existent concept, as Sraffa showed a long time ago (Sraffa 1932a and 1932b). Outside of an equilibrium state, there could be as many natural rates of interest as there are factor inputs. So what natural rate should banks target when setting interest rates?

I will leave a more detailed critique of Salerno’s paper for another post, but for the moment it is sufficient to note that Salerno (2012: 6, 37–38) invokes and indeed needs the non-existent natural rate of interest for his “new” ABCT to work, just like most of the other versions of the theory.

On this point alone, Salerno’s “reformulation” of the ABCT is as worthless as any other of the pathetic “reformulations” over the years.

Further Reading
“Hoover’s High Wage Policy and the Great Depression,” July 30, 2013.

“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.

BIBLIOGRAPHY
Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Ohanian, Lee E. 2009. “What – or Who – Started the Great Depression?,” NBER Working Paper Series, 15258
http://www.nber.org/papers/w15258

Salerno, Joseph. 2012. “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” Quarterly Journal of Austrian Economics 15.1: 3–44.
http://mises.org/journals/qjae/pdf/qjae15_1_1.pdf

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.

Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843–870.

Austrians Rush to Defend Mises

Just as I predicted, various Austrians have rushed to defend their hero Ludwig von Mises after reading Krugman’s recent post that linked to my own:

Robert P. Murphy, “Krugman on Mises on the Great Depression,” Mises Institute of Canada, January 28th, 2014
http://mises.ca/posts/blog/krugman-on-mises-on-the-great-depression/

Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014
http://bastiat.mises.org/2014/01/paul-krugman-attacks-ludwig-von-mises-another-win-for-austrian-economics/

I will deal with Joseph Salerno’s post elsewhere, and only focus on Murphy’s below.

Murphy’s first substantive point is to claim that Krugman is wrong to assert that “von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.”

First, I did not say that Mises totally dropped his business cycle theory, and it is quite possible Krugman did not mean to imply this either (since he linked to my post), and Murphy has misinterpreted him.

In point of fact, I said that “it is interesting that Mises thought that his Austrian monetary theory of the cycle could not adequately explain the severity and length of the Great Depression” (and people can read my original post and verify that for themselves). That is, Mises was forced to look for other explanations, rather like Hayek when the latter suddenly discovered the evils of “secondary deflation” as an additional cause of the length of the Great Depression.

At any rate, Murphy then selectively quotes this passage from Mises:

“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings. The most recent boom period did not run its course completely, at least not in Europe. Some countries and some branches of production were not generally or very seriously affected by the upswing which, in many lands, was quite turbulent. A bit of the previous depression continued, even into the upswing. On that account—in line with our theory and on the basis of past experience—one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.

The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.” (Mises 2006 [1931]: 163–164).

Yes, Mises desperately tried to say that his ABCT still applied as an explanation of the boom and cause of the initial downturn, but look at how feeble Mises’s attempt is:

(1) Mises admits that Europe did not experience a strong boom, and that on the basis of his own theory “one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.” That is, his theory lacked predictive power about the course of the bust after 1929.

(2) Secondly, Mises said that his theory could not explain the depth and length of depression in terms of the “unprofitability of many branches of production” and the high unemployment.

So my original statement is right. But ultimately this point is not that important, because the ABCT is wrong for many reasons I have explained here.

And Daniel Kuehn does a wonderful job here discrediting the Hayekian version of the Austrian business cycle theory, and most of his criticisms apply also to Mises’s original ABCT.

But next we come to Murphy’s hypocrisy. Murphy likes to present himself as great defender of Austrian economics, and rushes to defend the Austrian business cycle theory (ABCT) in his post, giving his devoted Austrian fans the impression that the beloved ABCT is safe and sound from the criticisms of that nasty ogre Krugman.

I, however, have actually read a great deal of Murphy’s work.

I direct readers to these fascinating writings by Murphy:

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Now what, you may ask, is the significance of this?

A substantial part of Murphy’s PhD (Murphy 2003: 58–177) is devoted to rejecting that theory generally accepted by Austrians called the “pure time preference theory of interest” and defending a monetary theory of the interest rate.

Murphy, like John Maynard Keynes and modern Keynesians, thinks that interest rates are a monetary phenomenon, and in this post even hails Keynes’ analysis in Chapter 13 of the General Theory as “brilliant”:

Robert P. Murphy, “Is Keynes from Heaven or Hell,” Free advice, 7 July 2011
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html

But the really important point is that Murphy’s paper “Multiple Interest Rates and Austrian Business Cycle Theory” is about as damning a critique of the classical Austrian business cycle theory (dependent on Wicksell’s natural rate of interest) as you will find.

Murphy accepts that the Austrian business cycle when it is based on Wicksell’s unique natural rate of interest is a flawed theory and cannot work in that form.

This is quite clear when Murphy comments on Hayek’s debate with Piero Sraffa:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

“Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

Murphy then discusses Lachmann’s (1994: 154) solution to Sraffa’s critique, but finds it wanting:

“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to ‘the’ real rate of interest.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).

So there you have it.

Wicksell’s natural rate does not exist, yet Hayek’s ABCT and Mises’s original ABCT in the form he held it in the 1930s uses the natural rate, as can be seen in Mises’s original 1931 paper that I originally quoted:

“According to the circulation credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy—expansion of bank credit by the issue or creation of additional fiduciary media (that is banknotes and/or checking deposits not covered 100 percent by gold). On a market, which is not disturbed by the interference of such an ‘inflationist’ banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as ‘natural’ or ‘static’ interest rates. If these interest rates were adhered to, then economic development would proceed without interruption—except for the influence of natural cataclysms or political acts such as war, revolution, and the like. The fact that economic development follows a wavy pattern must be attributed to the intervention of the banks through their interest rate policy. ….

At the interest rates which developed on the market, before any interference by the banks through the creation of additional circulation credit, only those enterprises and businesses appeared profitable for which the needed factors of production were available in the economy. The interest rates are reduced through the expansion of credit, and then some businesses, which did not previously seem profitable, appear to be profitable.” (Mises 2006 [1931]: 161).

It follows that if Murphy were intellectually honest and not an evasive shill for his fellow Austrian economists, he would graciously concede that his own published work entails that he himself appears to accept that the classical Austrian business cycle theory per se (using the natural rate) cannot explain recessions or depressions.

Krugman is right in rejecting the classical Austrian business cycle theory, even if not for the reasons that Murphy does.

BIBLIOGRAPHY
Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.

Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf