Response to Academic Agent on Modern Monetary Theory (MMT) Part 2

Academic Agent had a livestream here criticising my blog post that was a critique of his original video against MMT:



This stream is a train wreck. Academic Agent and his Austrian-school libertarians struggle to even accurately grasp Modern Monetary Theory (MMT).

I will not correct all the errors and misrepresentations here, or bother to correct every strawman argument.

But, first of all, let us just provide a knockout blow to Academic Agent and his minions. Throughout the earlier part of this stream, Academic Agent cannot understand how in a fiat money world, taxes and bonds do not, technically speaking, finance government spending. It appears that Academic Agent cannot imagine a state of affairs where a central bank directly monetised part of a government budget deficit, without concomitant bond issues, even though this has happened on numerous occasions since the abolition of the gold standard, as in Japan, Germany and New Zealand in the 1930s, America in World War II, and in post-1945 “tap systems” at central banks.

Under the historical “tap system” of issuing government bonds after the abolition of the Gold Standard after WWII, a number of Western countries (like Australia) for many years actually had their central banks purchase government bonds directly when such bonds were not all bought by private bondholders.

The system is explained by MMT economist Bill Mitchell at his blog:

“[around 1981] the Australian Office of Financial Management was set up as a special part of the Federal Treasury to manage federal debt. Previously, bond issues were made using the “tap system”, whereby the government would announce some volume of debt it wanted to issue at a particular rate and then sell whatever was demanded at that yield. Occasionally, given other rates of return in the financial markets the issue would not be fully subscribed – meaning some of the Government’s net spending would be covered in an accounting sense by central bank buying treasury bills (government lending to itself!). The neo-liberals hated this system and regarded it providing no fiscal discipline on government. They knew that by linking deficits $-for-$ with private debt they could more easily mount the debt hysteria and maximize their pressure on government to cut deficits and withdraw from the market.”
Bill Mitchell, “D for Debt Bomb; D for Drivel,” Bill Mitchell - Modern Monetary Theory, July 13, 2009.

That is to say, Australia once had a “tap system” of direct purchases of Treasury bonds by the national central bank when the private sector did not wish to buy all bonds at some issue of government debt, which means, in layman’s terms, on various occasions the Australian central bank was just “printing money” to fund part of the government’s budget deficit. Did Australia collapse into hyperinflation when this happened? Did the Australian dollar totally collapse? No.

Even the US Federal Reserve originally had the power to directly buy US government debt, and this was done in 1942 (during WWII) and some other years after WWII as well.

Most recently, in Britain as hit by the coronavirus pandemic, the Bank of England has increased the “Ways and Means facility” (a kind of government overdraft with the central bank) that can allow the British Treasury to finance spending without direct and immediate bond issuing. This would effectively be short-term “printing money” to finance UK government spending and allow the British Treasury to temporarily bypass the bond market:

Yves Smith and Richard Murphy, “At long last the Government can Borrow straight from the Bank of England – As Modern Monetary Theory has always suggested it should,” Nakedcapitalism.com, March 24, 2020.

Chris Giles and Philip Georgiadis, “Bank of England to directly Finance UK Government’s Extra Spending, Financial Times, April 9 2020.”

Larry Elliott, “Bank of England to Finance UK Government Covid-19 Crisis Spending,” The Guardian, 9 April 2020.

While at the moment, the British government says it will later this year borrow any money spent now unbacked by private bond issues, this is effectively a type of short-term MMT in action right now! How does Academic Agent explain all this if MMT is impossible?

Now let us go on to address the following major points:

(1) Quantitative Easing (QE)
Post Keynesians and MMT advocates do not advocate QE as a major policy tool.

The primary tool is fiscal policy. In a serious recession/depression, Keynesian deficit stimulus in the form of new, or improved, public infrastructure, public utilities, R&D and social spending is the primary method to get people back to work, and stimulate private investment and employment growth.

Money would be paid directly to any unemployed people hired by the state or to any business from which the state buys resources, and hence money would be spent into the economy as newly-hired workers and businesses spend money.

(2) The Purpose of Taxes in MMT
According to MMT, taxes function to:

(1) regulate aggregate demand;
(2) free up real resources for the government to purchase when there is a high level of economic activity, or for people to whom government pays money (that is, state employees, or welfare recipients)
(3) dampen inflation at times of inflationary pressures
(4) address moral issues like gross inequality of wealth, and prevent a plutocratic system where highly wealthy people have so much money they can control democracy and governments.

MMT does not advocate the abolition of taxes because they still have an important role to play.

(3) Relative Price Rigidity
First of all, Academic Agent persistently commits a comical strawman argument when he is confronted with the reality of relative price rigidity: Academic Agent pretends this means that no prices ever change, or that all prices are rigid for long periods of time.

This is a pathetic and pathologically dishonest tactic. Academic Agent, at this point, is simply forced to use this tactic, probably because he cannot think of a plausible response to the widespread reality of relative price rigidity.

This strawman leads Academic Agent to his risible attempt to refute me by citing price data from 1972 (which, in point of fact, was a period of strong supply-side inflation!). Merely showing that prices change does not refute anything I said about relative price rigidity, because “relative price rigidity” doesn’t mean that no prices ever change. Of course, cost-based mark-up prices do change, but often because unit costs rise or businesses demand higher profits.

Moreover, what does widespread “relative price rigidity” actually mean?

It means this:

In the real world, there is a high degree of relative price rigidity, but relative to the models of Austrian or Neoclassical theory, where prices are assumed to be highly flexible, rapidly responsive to demand changes, and are flexible enough to cause a rapid and effective tendency towards market clearing in product markets.

Note well: this does not mean there is no flex-price sector (where prices are highly flexible) or no auction or auction-like markets.

This does not mean there are no goods whose production is inelastic and hence supply and demand have a greater role in determining prices.

For example, on world markets for many years oil prices were set by the cartel OPEC. But in recent decades, OPEC’s power has weakened and prices are much more influenced by production decisions by “swing producers”. Thus oil prices are much more flexible than cost-based mark-up prices used in industrial manufacturing and the service sector.

Some goods like fresh produce, petrol, and seafood clearly have much more flexible prices than other goods, especially when goods are perishable.

In the retail sector, there is a higher degree of flexible prices, given retail sales. However, in the service sector and manufacturing sector, many prices are highly inflexible with respect to demand changes. Since both the service and manufacturing sectors together dominate most market economies, the use of widespread cost-based mark-up prices in these sectors are the fundamental cause of relative price inflexibility.

So the fundamental point here is that the size and prevalence of flex-price markets are grossly exaggerated.

Academic Agent’s fellow Austrian called “Radical Liberation” in this stream also commits gross strawman arguments. “Radical Liberation” claims that I asserted or showed that there is only “a little bit of [price] stickiness.” This is utterly false.

“Radical Liberation” also claims I assert that I think prices need to change instantly to changes in demand. This is also false. In Austrian theory or more dogmatic Neoclassical models, prices must change relatively quickly and rapidly to achieve an effective tendency to supply and demand equilibrium in product markets, not instantly.

In the real world, there is a very high degree of relative price rigidity, and this has been admitted for decades even in mainstream Neoclassical research literature. For example, here is some literature on the empirical evidence for relative price rigidity:

Means, G. 1935. “Industrial Prices and their Relative Inflexibility,” Senate Document 13, 74th Congress, lst Session, US Government Printing Office, Washington, DC.

Means, G. C. 1936. “Notes on Inflexible Prices,” American Economic Review 26 (Supplement): 23–35.

Means, G. C. 1939–1940. “Big Business, Administered Prices, and the Problem of Full Employment,” Journal of Marketing 4: 370–381.

Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.

Stigler, G. J. and J. K. Kindahl. 1970. The Behavior of Industrial Prices. New York.

Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.

Beals, R. 1975. “Concentrated Industries, Administered Prices and Inflation: A Survey of Empirical Research,” Council on Wage and Price Stability, Washington.

Carlton, Dennis W. 1986. “The Rigidity of Prices,” The American Economic Review 76.4: 637–658.
This paper presents an analysis of price rigidity in America, and finds that for “many transactions, prices remain rigid for periods exceeding one year” (Carlton 1986: 637) and it “is not unusual in some industries for prices to individual buyers to remain unchanged for several years” (Carlton 1986: 638).

Cecchetti, Stephen G. 1986. “The Frequency of Price Adjustment: A Study of the Newsstand Prices of Magazines,” Journal of Econometrics 31: 255–274.
This is a study of price rigidity in the prices of magazines.

Bils, M. 1987. “The Cyclical Behaviour of Marginal Cost and Price,” American Economic Review 77: 838–855.

Bhaskar, V., Machin, Stephen and Gavin C. Reid. 1993. “Price and Quantity Adjustment over the Business Cycle: Evidence from Survey Data,” Oxford Economic Papers n.s. 45.2: 257–268.
This paper reports data from a questionnaire posed to managers of 73 small UK firms in 1985. It shows quantity adjustments “are overwhelmingly more important than price adjustments over the business cycle” (Bhaskar 1993: 257) and “[m]ost firms do not increase prices in booms or reduce them in recessions, and when they do, managers suggest that these are relatively unimportant” (Bhaskar 1993: 266).

Kashyap, Anil K. 1995. “Sticky Prices: New Evidence from Retail Catalogs,” Quarterly Journal of Economics 110: 245–274.

Blinder, A. S. et al. (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.
This book reports a well-sampled survey of 200 US businesses. It was found that a typical good in the US is repriced roughly once a year, and prices are most sticky in the service sector, but the least sticky in wholesale and retail trade (Blinder et al. 1998: 105). Over 50% of firms said that they would not increase their prices when demand increased (Downward and Lee 2001: 476).

Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
This book reports a survey conducted by P. Downward involving 283 UK manufacturing enterprises (Downward 1999: 150–151). When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). When asked whether the firm sets prices to create price stability on the market, 65.5% of firms said “very often” (17.3%) or “often” (48.2%) (Downward 1999: 160).

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.
This paper reports the results of a survey of 654 UK companies in 1995. When asked what happens when there is strong demand and this cannot be met from inventories or stocks, only 12% of firms said they would increase the price of their goods (Hall, Walsh, and Yates 2000: 442).

Bils, Mark and Peter J. Klenow. 2004. “Some Evidence on the Importance of Sticky Prices,” Journal of Political Economy 112.5: 947–985.
This paper shows a higher degree of price flexibility but only by including mere temporary price cuts (as in retail sales). Their method is disputed by Nakamura and Steinsson (2008) who point out temporary sales not affecting long-run prices of a good are abnormal and make prices appear more flexible than they really are.

Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/
This paper examines price setting in a survey of 170 private, unregulated, non-primary sector Canadian firms. An impressive 67.1% of firms surveyed attributed price inflexibility to “cost-based pricing,” that is, to mark-up pricing (Amirault, Kwan, and Wilkinson 2004: 21).

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp333.pdf
This paper reports a survey in 2003 of 333 industrial and service firms in Italy (Fabiani et al. 2004: 8). It was found that about 60% of firms review prices once a year, and around 50% only actually change prices once a year too (Fabiani et al. 2004: 21).

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf
This paper reports a 2004 survey of 873 Austrian firms mainly in the manufacturing sectors. The firms were asked how often they changed prices on average in a given year: No change: 22.1%; Once a year: 54.2%; 2 to 3 times a year: 13.9% (Kwapil, Baumgartner and Scharler 2005: 18). Moreover, 63% of firms said they would leave their prices unchanged in response to a large positive demand shock, and 52% would leave prices unchanged in response to a large negative demand shock (Kwapil, Baumgartner and Scharler 2005: 33). In the face of small demand shocks (either positive or negative), 82% of firms simply leave prices unchanged (Kwapil, Baumgartner and Scharler 2005: 33).

Parker, Miles. 2017. “Price-Setting Behaviour in New Zealand,” New Zealand Economic Papers 51.3: 217–236.
An earlier version is online here:
Parker, Miles. 2014. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf
This paper reports a survey of 5,300 firms selected as a representative sample of all sectors of the New Zealand economy (Parker 2017: 217). It was found that the average firm reviews prices twice a year but changes its prices only once a year (Parker 2017: 229). When asked whether temporary price reductions were important, 44% of firms said “not at all,” and 17% said “a little important” (Parker 2014: 17).

Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.
This paper reports results from a survey of about 600 private-sector firms in Sweden. When asked to report how often prices were changed, the weighted results were that 40.3% of firms change prices once per year, and 27.1% adjust their prices less than once a year (Apel et al. 2005: 318).

Aucremanne, Luc and Martine Druant. 2005. “Price-Setting Behaviour in Belgium. What can be learned from an ad hoc Survey?,” ECB Working Paper Series No. 448.
This paper report the results of a survey of 1,979 firms in the industrial, construction, trade and services sectors, in a sample that should represent about 60% of Belgian GDP. It was found that 55% of firms changed prices once a year, 18% less often, and 27% more than once a year (Aucremanne and Druant 2005: 31).

Martins, Fernando. 2007. “How Portuguese Firms set their Prices,” in S. Fabiani, C. Suzanne Loupias, F. M. Monteiro Martins and Roberto Sabbatini (eds.), Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York. 152–164.
This chapter reports a 2004 survey by the Banco de Portugal of 1,370 Portuguese firms, mainly from manufacturing. The survey found that 75% of firms generally changed their prices but once a year (Martins 2005: 24).

Nakamura, Emi and Jón Steinsson. 2008. “Five Facts about Prices: A Reevaluation of Menu Cost Models,” The Quarterly Journal of Economics 123.4: 1415–1464.
This paper shows that without mere temporary price cuts (as in retail sales where prices revert to the normal, higher level after a sale) average prices change infrequently: only about every 7–11 months.

Langbraaten, Nina, Nordbø, Einar W. and Fredrik Wulfsberg. 2008. “Price-setting Behaviour of Norwegian Firms – Results of a Survey,” Norges Bank Economic Bulletin 79.2: 13–34.
This reports a well-sampled survey of 725 firms throughout many sectors of the Norwegian economy: nearly 50% of firms said that they only changed their product price once a year, and about 23% of firms said that they changed the price twice a year (Langbraaten et al. 2008: 18).

Levy, Daniel. 2007. “Price Rigidity and Flexibility: New Empirical Evidence,” Managerial and Decision Economics 28.7: 639–647.
This review article summarises 14 empirical studies of price rigidity in a special issue of Managerial and Decision Economics.

Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
This paper reports a survey of 1000 Irish firms. When firms were asked how likely it was that they would adjust prices downwards in response to a negative demand shock, 66.5% of firms said that negative demand shocks were of little or no relevance to pricing decisions.

Klenow, Peter J. and Benjamin A. Malin. 2011. “Microeconomic Evidence on Price-Setting,” in Benjamin M. Friedman and Michael Woodford (eds.), Handbook of Monetary Economics Volume 3A. North Holland, Amsterdam and London. 231–284.
This chapter provides a table on p. 239 (Table 4) that lists surveys and studies from 19 nations on price rigidity. The data mostly comes from service and industrial sectors (and sometimes in addition also other sectors). For most nations, prices change “on average” at least once a year (Klenow and Malin 2011: 242). If merely short-lived prices (such as mere temporary price discounts) are excluded, prices change closer to once a year (Klenow and Malin 2011: 232).

Nakamura, Emi and Jón Steinsson. 2013. “Price Rigidity: Microeconomic Evidence and Macroeconomic Implications,” Annual Review of Economics 5: 133–163.

Kehoe, Patrick and Virgiliu Midrigan. 2015. “Prices are Sticky after All,” Journal of Monetary Economics 75: 35–53.

The reality of relative price rigidity is why even Monetarists and other more realistic Neoclassicals are forced to take account of short-run price and money wage stickiness in their models, and why many advocate activist monetary policies in a recession or depression.

Yet another crucial piece of evidence of relative price rigidity is that during most recessions since 1945 general price inflation continues even in the contraction of demand and we hardly ever see price deflation in a recession. The general price level in recessions still rises, and generally recessions are just disinflationary (lower rates of infation). In the United States since 1945, for example, virtually every recession has been inflationary: the only exceptions are 1949–1950, 1954–1955, and 2009.

Secondly, Academic Agent’s claim that Austrian theory is only looking at the prices of a good across a whole economy is a bizarre and blatant falsehood.

While Austrian price theory and the Austrian Theory of the Firm are of course not predicting what all firms do, they nevertheless must predict what the majority of firms do, or the average firm does, because otherwise they would be empirically false.

Murray Rothbard says the following about price determination:

“Private business prices its goods and services to ‘clear the market,’ so that supply equals demand, and there are neither shortages nor goods going unsold.” (Rothbard 2006a: 259).

If Rothbard isn’t talking about the average real-world firm here, or the majority of real-world individual firms, then what the hell is he even talking about?

During this pandemic crisis, some good prices have risen where production is inelastic (such as in fresh fruit and vegetables) or where supply-side issues have happened, but, as I stated, in many cases large supermarkets and retailers have maintained the prices of goods like toilet paper, tissues and hand sanitiser, even when shelves are empty.

More flexible prices on eBay or marginal small shops are obviously not representative of all prices, since only small quantities of the products in question are sold at the margins at these places.

The large supermarkets and retailers are where the vast majority of sales happen, and it was not “evil” government that is forcing them to maintain prices: the producers and retailers are largely choosing themselves to maintain prices, since this is their normal behaviour anyway with respect to many goods and services when demand changes: if demand increases, often production is simply ramped up and prices remain unchanged.

(4) Cantillon Effects
Academic Agent fails to understand my critique of the Cantillon Effect. My position is not Cantillon effects never happen at all.

My original position is that in the face of widespread relative price rigidity, Cantillon effects are likely to be minor and marginal, and, on their own, cannot possibly be a serious objection to government spending based on increasing the money supply, because all private sector activity that also increases spending by increasing the money supply would also cause the same type of minor or marginal Cantillon effects.

At this point in the discussion, “Radical Liberation” falsely claims I asserted that prices need to change instantly to changes in demand. Again, this is wrong. For major Cantillon effects to happen, most prices must be highly flexible in response to demand, and change relatively quickly and rapidly.

Also, Academic Agent totally misses my point about the gross contradiction in his reasoning in relation to the orthodox Quantity Theory of Money and the existence of Cantillon effects at the same time, since Austrian economics requires the rejection of short and long-run money neutrality, but money neutrality is a fundamental assumption of the Quantity Theory of Money.

(5) The Quantity Theory of Money
Here it appears that Academic Agent refuses to defend the orthodox Quantity Theory of Money.

At least this is in line with the most important Austrian economists, who did not defend the orthodox Quantity Theory of Money either, but had serious criticisms.

However, changes in the general price level are a highly complex result of many factors, and not some simple function of money supply. Real factors also are an important factor in driving inflation.

If we dig deeper into the Austrian view of inflation, we can find some surprisingly sensible analysis.

Curiously, the Austrian economist Frank Shostak has a surprisingly sensible view on inflation:

“the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services .... While increases in money supply (i.e., inflation) are likely to be revealed in general price increases, this need not always be the case. Prices are determined by real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant – i.e., inflation is high – prices might display low increases.”
Frank Shostak, “Defining Inflation,” Mises Daily, March 6, 2002.

The statement that prices “are determined by real and monetary factors” is, essentially, empirically correct (although, from the Post Keynesian perspective, still needs qualification), but requires we reject the Monetarist superstition that “inflation is always everywhere a monetary phenomenon,” which Academic Agent appears to defend.

As I said, while a long-run, sustained price inflation does need a growing money supply to sustain it, the money supply is often not the causal factor in such price inflations, but the intermediary factor. Monetarists mistake the intermediary medium (money supply) for the only and fundamental driver of price inflation, when real factors underlie movements in prices.

To put this another way, in serious depressions, the falling money supply (when so much of the money supply is understood to be credit money) was not so much the cause of the collapse of economic activity, but the consequence of the collapse in economic activity as credit demand collapsed (though, of course, when banks failed and depositors lost their money savings, this affected economic activity too).

In fact, this is the whole point of the Post Keynesian insight into capitalism: the ability to increase production in an historically unprecedented way is achieved in modern capitalism not simply by superior technology and production methods, but also by an endogenous money supply: a banking and monetary system where capital investment can be financed by new credit money, not backed by prior “saved” money.

As Nicholas Kaldor said in “The Irrelevance of Equilibrium Economics” (Economic Journal 82 [1972]: 1237–1252):

“This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined.” (Kaldor 1972: 1250).

Money supply growth, then, is a necessary condition of not only long-run, sustained price inflation, but also a dynamic, highly-productive capitalist economy, because most money is credit money created by banks and, in earlier pre-1930s capitalist eras, by private sector agents who created bills of exchange, promissory notes, negotiable cheques, fractional reserve credit money (book money) and private bank notes.

In this sense, at a fundamental level, in a modern advanced capitalist economy, economic activity and demand for credit drives money supply growth, although in commodity money systems, exogenous growth in the money supply did happen via new gold discoveries, which could then cause demand-side inflation.

The more a modern capitalist economy has an endogenous money system, the more that the Quantity Theory fails to apply.

(6) Full Employment and William H. Hutt
Here Academic Agent appears to largely concede my critique is valid.

However, when Academic Agent (at 2.14.11) states that “the economy does not have the goal of full employment,” he appears to have forgotten the whole point of flexible money wages in Neoclassical and Austrian theory: a flexible money wage (and absence of other alleged harmful interventions) is supposed to cause a strong tendency towards the clearing of the labour market, which is just another way of saying that free markets are supposed to have a strong tendency towards elimination of involuntary unemployment and high levels of employment.

Moreover, Academic Agent makes the insane charge (from 2.17.29) that Post Keynesians wish to create something like Mises’ “Evenly Rotating Economy” (a fictitious general equilibrium state) when nothing is further from the truth: Post Keynesians totally reject general equilibrium analysis or the idea that a dynamic capitalist economy that faces uncertainty and constant change could ever have a tendency to general equilibrium, or could ever reach that state.

BIBLIOGRAPHY
Kaldor, N. 1972. “The Irrelevance of Equilibrium Economics,” Economic Journal 82: 1237–1252.

Rothbard, Murray N. 2006a. For a New Liberty: The Libertarian Manifesto (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Proto-Keynesians in the Last Years of Weimar Republic Germany

It is well known that the Great Depression hit Weimar Republic Germany particularly hard. There was severe unemployment, and the wage and price deflation was also severe, as can be seen in these graphs (with data from Mitchell 1992):

Moreover, the wage and price deflation did not bring about a rapid or effective recovery. Austerity policies clearly failed in the Weimar Republic, and a number of German businessmen, bureaucrats, journalists, and unorthodox economists were driven to advocate the only real policy solution that had not been tried: namely, unemployment relief and stimulus of the economy by large-scale deficit spending and public works programs.

Proto-Keynesian ideas were already being advocated in Germany before 1933 by the following people:

(1) Wilhelm Grotkopp (a business journalist) and Heinrich Drädger (a businessman) through the organisation they created in November 1931 called the Studiengesellschaft fur Geldund Kreditwirtschaft (Society for the Study of Money and Credit).
Both Grotkopp and Drädger held PhDs in economics, and advocated countercyclical fiscal policy in various meetings of their society in 1931 and 1932 and in writings for the public (Garvy 1975: 398).

(2) Wladimir S. Woytinsky (a statistician of the German Trade Union Federation).
Wladimir S. Woytinsky had been a Russian Bolshevik and then Menshevik who had fled to Germany in 1922. In 1931, Woytinsky published a paper in a German trade union journal supporting a credit-financed public works program for Germany (Garvy 1975: 399). This paper was called “Aktive Weltwirtschaftspolitik” (Arbeit 6 [June] 1931). In 1931 and 1932 Woytinsky continued a public campaign thorough the media to support his proposals, and he enlisted the support of Fritz Tarnow (who had already endorsed expansionary spending in a book) and Fritz Baade (head of a government agency for agricultural marketing). The plan was dubbed the “WTB Plan” (from the initials of Woytinsky, Tarnow and Baade).

(3) Ernst Wagemann (the head of both the Reich’s Statistical Office and the Institute of Business Cycle Research).
In 1932, Ernst Wagemann advocated a plan for reducing unemployment by deficit-financed public works programs in a book called Geld- und Kredit Reform (Berlin, 1932).

(4) Wilhelm Lautenbach (an official in the Ministry of Economics).
Wilhelm Lautenbach had in September 1931 advised the Weimar government to use bank credit for public works programs to relieve unemployment in a memorandum called “Moglichkeiten einer Konjunkturbelebung durch Investition und Kreditausweitung” (Opportunities for Economic Recovery through Investment and Credit Expansion).

These proposals to use fiscal stimulus and public works received varying degrees of support from other intellectuals in Germany such as Adolph Lowe, Emil Lederer, Werner Sombart, F. Baade, and G. Colm (Garvy 1975: 398).

In particular, the deficit-financed public works proposals of W. S. Woytinsky are interesting, and deserve further analysis.

Woytinsky had even corresponded with Keynes in December 1931, and requested that Keynes participate in an international trade union committee which Woytinsky thought would endorse his ideas (though the Board of the International Labour Federation failed to endorse or examine Woytinsky’s plan: see Garvy 1975: 400).

Keynes replied that his spoken German was not good enough and he was too busy to be involved in this endeavour (Garvy 1975: 401). A modified version of Woytinsky’s plan was later formally adopted by the German Trade Union Federation in April 1932 (Garvy 1975: 401), but, astonishingly, the German Social Democrats and their prominent Marxist intellectual Rudolf Hilferding refused to give Woytinsky’s plan any support (Garvy 1975: 401).

One can only marvel at how stunningly worthless the German Social Democrats were during the last years of the Weimar Republic in Germany, in that they shunned the only real economic policy that could have rapidly ended the Great Depression. A similar state of affairs occurred in Britain, where the British Labour party endorsed Neoclassical austerity and also shunned Keynesian policies to end the Great Depression in Britain.

In a meeting between Wladimir S. Woytinsky and the German Social Democrats in August 1932 in which Woytinsky’s plans for public works programs were discussed, the monumentally stupid Marxist Rudolf Hilferding rejected Woytinsky’s ideas to end unemployment by public works, because, he maintained, this was not a Marxist policy (Berman 2006: 114).

Wladimir S. Woytinsky later wrote an account of the meeting in his autobiography:

“The [sc. WTB] Plan gained more and more popularity in the nation [sc. in 1932], but the S-D party remained adamant and refused to use the slogan of public works in the Reichstag election campaign in July, 1932. It preferred to stick to Brüning’s guns — defense of the currency. The results of the election were catastrophic for the Republic. The Nazis gained more than one third of all the votes and 230 seats out of the Reichstag’s 568. The new Reichstag had a clear anti-republican majority of Nazis and Communists and was unable to form a republican government. All parties began to brace themselves for a new appeal to the voters.

Leipart called me to his office. ‘The party,’ he told me, ‘has agreed to meet with us to discuss the plan of public works. There will be forty party representatives and as many from the labor unions. Will you prepare our case for the conference?’

I asked Gerhard Colm, a scholar of national reputation, not connected with the labor movement, to be our reporter. The party named [sc. Rudolf] Hilferding as its spokesman. I was slated to open the panel discussion with a rebuttal of Hilferding’s arguments.

The conference was held in a large room in the Reichstag building. Everyone sat around a horseshoe-shaped table covered with green cloth. Wells occupied the chair, with the union people at his right and the Reichstag members at his left. Red in the face, he opened the discussion grimly. ‘It is time to end this silly dispute. Inflation-deflation, public works ... I do not know what. . . . This non-sense must be stopped.’

Colm spoke in an academic way, developing a theory that since has become commonplace. The price level and volume of economic activities can be regulated by monetary and credit measures. Public works is the best, and politically the most expedient, approach to the problem.

Hilferding was the next speaker. ‘Colm and Woytinsky,’ he said, ‘are questioning the very foundations of our program, Marx’s theory of labor value. Our program rests on the conviction that labor, and labor alone, creates value. Prices deviate from labor values under the impact of the interplay of supply and demand. Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to the collapse of this system. If Colm and Woytinsky think they can mitigate a depression by public works, they are merely showing that they are not Marxists.’

My first thought was that Hilferding could not have taken that nonsense seriously. Obviously, he had a limitless contempt for his listeners and did not condescend to argue before them but appealed to the cliches in their brains. A score of deputies listened to him as to an oracle. Wells sat motionless in his armchair, his eyes closed and his head sunk on his breast. Hilferding ended with an appeal to the party to rise united to the defense of a sound currency and Marxism.

I began my rebuttal. ‘The flood of unemployment is rising, the people are at the end of their patience. The workers, holding us responsible for their misery, are deserting the party to join the Communists and Nazis. We are losing ground. There is no time to waste. Something must be done before it is too late. Our plan has nothing to do with any particular value theory. Any party can execute it. And it will be executed. The only question is whether we take the initiative or leave it to our enemies. It is not true — ’

I felt that I was gaining the audience, but suddenly a deafening noise came from the head of the table. Wells was pounding the desk with both fists and shouting, ‘Shut up! I will not permit — ’

‘You will not permit what?’ I asked in consternation.

‘You said it is not true.’ If what Hilferding said is not true he must be a liar! I will not permit — ’

Hell broke out, a dozen people shouting. Wells fell back into his chair, with closed eyes and his head sunk on his breast, sound asleep. Leipart asked me to continue, but the effect of my speech was completely lost. I elaborated the technical and financial aspects of the Plan. Nobody listened — for the union people this was old stuff and the Reichstag deputies did not care. After a few remarks from both sides, Leipart put the ADGB plan to a vote. All the representatives of the unions raised their hands in favor of it, all the representatives of the party except Baade voted ‘nay.’

The break between the party and the unions was complete.” (Woytinsky 1961: 470–472).

So, at this meeting, the Social Democratic party doomed itself to continuing electoral disaster, and revealed itself to be in the grip of deranged Marxists, who, urged on by Hilferding, were united in the defence of “sound currency [!] and Marxism.”

In contrast, the left-wing of the Nazi Party led by Gregor Strasser supported a large-scale public works program called the “emergency program” in May 1932, when Strasser had given his famous “Work and Bread” speech in the Reichstag. Here we must remember that the actual name of the Nazi party was the “National Socialist German Workers’ Party” (Nationalsozialistische Deutsche Arbeiterpartei or NSDAP), and it did have a real anti-capitalist wing around Gregor Strasser called the Strasserites, who were purged in the Night of the Long Knives (29 June 1934).

The endorsement by Gregor Strasser of a proto-Keynesian policy to end unemployment in Germany in May 1932 was surely one factor in the electoral success of the Nazi party in July 1932, when the party won 37.3% of the vote in the Reichstag elections.

Of course, it is well known that when Hitler became chancellor of Germany in 1933, he began to enact large-scale deficit spending which financed public works programs, civilian spending and rearmament.

Years later, the Post Keynesian economist Joan Robinson – in an article in 1972 – pointed out the following:

“I do not regard the Keynesian revolution as a great intellectual triumph. On the contrary, it was a tragedy because it came so late. Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred.” (Robinson 1972: 8).

However, Joan Robinson was not quite right here, because the inspiration for these policies, as we have seen, did not originally come from the Nazis, but from German businessmen, bureaucrats, journalists, unorthodox economists and from Wladimir S. Woytinsky, who had been, before coming to Germany, a literal Russian Bolshevik and Menshevik in the Soviet Union.

The Nazi deficits from 1933 were hidden and kept secret by means of special bills called Öffa bills and MEFO bills which were redeemable at the Reichsbank for reserves by German banks. The most important of these bills was the MEFO bill, issued by a dummy company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). For an extended discussion of MEFO bills and Hjalmar Schacht’s ingenious controls on foreign exchange and trade, see here.

The real lesson here is that the sheer catastrophe of the Great Depression in Germany forced original thinkers to the only solution left that could actually work: large-scale deficit spending and public works programs.

As I outlined in a previous post on pre-1938 fascist Austria here, history ran a most fascinating experiment for us from 1933 to 1939: in Austria, the clerical fascists pursued austerity with wage and price deflation from 1934 to 1937, partly under advice from Ludwig von Mises, while in Germany from 1933 the National Socialist government of Hitler implemented deficit-financed stimulus and public works programs and other highly effective economic interventions (such as restrictions on imports and rationing of foreign exchange to overcome balance of payments problems). Germany rapidly recovered from the Great Depression.

The best way to illustrate this is simply by looking at a graph of both Austrian and German unemployment from 1928 (with German unemployment rate from Mitchell 1992: p. 160 and 163, B2, and Austrian unemployment from Stiefel 1979: 29):

This speaks for itself.

BIBLIOGRAPHY
Berman, Sheri. 2006. The Primacy of Politics: Social Democracy and the Making of Europe’s Twentieth Century. Cambridge University Press, Cambridge.

Garvy, George. 1975. “Keynes and the Economic Activists of Pre-Hitler Germany,” Journal of Political Economy 83.2: 391–405.

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

Robinson, Joan. 1972. “The Second Crisis of Economic Theory,” The American Economic Review 62.1–2: 1–10, at p. 8

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

Woytinsky, Wladimir S. 1961. Stormy Passage: A Personal History through Two Russian Revolutions to Democracy and Freedom: 1905–1960. Vanguard Press, New York.

Trump the Keynesian causes Libertarian Heads to Explode

Right here. Except this libertarian idiot connects Keynesianism to Herbert Hoover, which demonstrates, if nothing else, how libertarians never seem to get anything right.

Apparently Trump did an interview recently where he said this:

“Mr. Trump himself said in a telephone interview last week that he believed more borrowing and spending would help lift economic growth, a departure from traditional Republican economics.

‘It’s called priming the pump,’ Mr. Trump said. ‘Sometimes you have to do that a little bit to get things going. We have no choice — otherwise, we are going to die on the vine.’”
Nelson D. Schwartz, “Clinton? Trump? Either Way, Count on Deficit Spending to Rise,” New York Times July 31, 2016.

I can’t track this interview down, and would be interested to see what he actually said in full.

If true, it would not be surprising, since in Chapter 12 of Trump’s book Crippled America: How to Make America Great Again (New York, 2015), even if supposedly largely ghostwritten, we find passages praising infrastructure projects as a way to create jobs and even invoking the Keynesian multiplier and the positive effects of such infrastructure stimulus on private sector economic activity. “If we do what we have to do correctly,” we read, “we can create the biggest economic boom in this country since the New Deal when our vast infrastructure was first put into place.” There are hints that deficit-financed spending is envisaged as the way to pay for this.

I like what I’m hearing, Donald.

I’m on Twitter:
Lord Keynes @Lord_Keynes2
https://twitter.com/Lord_Keynes2

On the Value of Work in a Social Democracy

A career and a job where one does economically and socially useful work is an important part of any successful, healthy and wealthy society. But more than this, it gives people an identity through the job that they have and a social dignity lacking in long-term unemployment.

There are of course a lot of difficult, boring, dirty and sometimes dangerous jobs that have to be done, but a technologically advanced society like ours can use its inventive genius to create more and better machines and automation to do these jobs, so that human beings aren’t forced to do them.

But not all jobs are like the ones described above. For many people, their jobs – while often challenging or requiring hard work – are nevertheless safe, interesting, rewarding, and sometimes enjoyable. Some people are lucky enough to have jobs they absolutely love.

A really decent society run on social democratic principles would provide full employment and not leave people on welfare to become a deskilled, demoralised, dependent and depressed class of people, some of whom descend into irresponsible hedonism and drug abuse.

And there is certainly something to be said for the principle that people should not be allowed to simply live off welfare for years on end as long-term unemployed, but not as in the vicious and victim-blaming right-wing hysteria of libertarians or neoliberals – the latter having increasingly imposed a vicious, disgusting and punitive welfare system over the past 30 years.

The whole point of a society run on social democratic and Keynesian principles of full employment is precisely: we shouldn’t even need a big welfare bill for people of working age, because by means of (1) macroeconomic management of the private sector and (2) government employment programs at decent wages, there would only be a small body of unemployed anyway (essentially people in seasonal and frictional unemployment).

To achieve this today would require not just fiscal policy to create jobs in the private sector but government employment programs to find and create economically and socially useful work, e.g., in public infrastructure development, housing, social services, etc. That of course requires much more government planning than we currently have and perhaps ditching parts of the current welfare system (except for people who cannot work) for a system where people not employed in the private sector are provided with work at better and decent wage rates in public sector jobs. Private sector jobs probably do need to pay more, as in MMT-style job guarantee programs, but even in recruitment and distribution of people between the sectors more planning probably has its virtues too.

One could have a universal basic income under such a system, but everybody who is fit for work should be provided with a job appropriate for them and their skills to obtain income above the universal basic income. Such a system in, say, the United States would, I strongly suspect, start to do something substantive to fix the social problems of the African American community and white working classes too.

In that respect, a social democratic and, for that matter, old-fashioned socialist system is certainly not about shoving the human race onto welfare or the dole, but it is about bettering the human condition through a system that really does value work and employment and provides it for its citizens, as compared with a dysfunctional laissez faire capitalism that repeatedly fails to provide full employment.

In that respect, there is also something to be said for this Marxist take on this subject, even though I would shun the doctrinaire aspects of Marxism and reject a command economy. But, as the author says, it is true that there are some people who do not wish to work, and:

“Socialism is not about putting everyone on the dole, but putting everyone to work, doing work with dignity, respect, honor, satisfaction, and human fulfillment. Not everyone wants to work. Not everyone wants to be a civilized human being. Those who don't want to work, those who want to be predators, they will feel the hammer of the state, hard enough to satisfy any authoritarian.”
http://barefootbum.blogspot.com/2016/03/a-rant-on-socialism-authoritarianism.html

I wouldn’t go that far, however. The “hammer of the state” is a bit too much for me, unless the people in question are criminals. But a sensible punitive demand that people – especially young men – should not be lazy and irresponsible work-shy hedonists is not objectionable by any means.

Now today, while there is plenty of manual labour and unskilled labour that could be done under such a system even in the first world nations, there is also a very great deal of economically and socially useful work that can be done by intellectuals trained at universities, e.g., in the natural sciences, engineering, medical science, neuroscience, computer science, and the more useful social sciences.

Above all, governments in the Western world could also begin to employ people in much larger programs to start really helping with Third World development, e.g., health care, public infrastructure, disease control, education, etc. Promoting Third World development by allowing a space for independent economic development, import substitution industrialisation, utterly reformed international institutions and direct assistance by Western labour would be far better than the current system of neoliberalism.

It is undoubtedly true that as technological development soars, automation, robots and artificial intelligence will make it more and more difficult to find work for people of value, but nevertheless economically and socially useful work will still be of great value, even if the working day and working week will probably shrink as compared with today.

Keynesianism could probably have prevented World War II

Let us look at the simple facts relating to the rise of the Nazi party in the 1930s.

This is the Nazi party share of the vote in federal elections in the Weimar Republic from 1924 to 1933:

Date | % of Vote | Reichstag Seats
May 1924 | 6.5% | 32
Dec. 1924 | 3.0% | 14
May 1928 | 2.6% | 12
Sep. 1930 | 18.3% | 107
July 1932 | 37.3% | 230
Nov. 1932 | 33.1% | 196
March 1933 | 43.9% | 288
http://en.wikipedia.org/wiki/Nazi_Party#Federal_election_results

By 1928, during the economic boom in Germany, the Nazi party vote looked like it was almost dead and was only 2.6%. Remarkably, even in the aftermath of the Weimar hyperinflation in 1924 it was only 3%.

When the deflationary depression struck Germany from 1929–1932, it soared to 18.3% (September 1930), then 37.3% (July 1932), and finally to 43.9% in March 1933 in the aftermath of the Great Depression. Hitler became Chancellor on 30 January, 1933, admittedly after some political jockeying.

It was the depression that essentially made the Nazi party and made Hitler chancellor.

Had the Weimar Republic government intervened in 1930 and 1931 onwards with policies to stabilise the financial system, provide massive fiscal stimulus, and employment programs, then the Great Depression in Germany would have been quickly reversed and prevented and the Nazi share of the vote would very probably have stayed relatively low. Hitler would never have been a plausible candidate for chancellor in 1933 and crucially the threat from communism would also have been much weaker.

Without the Nazis, it seems very difficult to see how the Second World War would have happened.

Is Peter Hitchens a Keynesian?

I am currently interested in the British political scene at the moment, in view of the general election that is due on 7 May, 2015.

However, before I get to the main point below on the interesting British Conservative Peter Hitchens, some background is necessary.

The post-World War II Keynesian consensus in Britain – which regarded full employment as a major aim of government economic policy – died an unfortunate death in the 1970s and 1980s. It was unfairly blamed for the stagflationary crisis of the 1970s (for evidence and arguments to support this, see here and here).

If one wants to look at the data on UK unemployment, to see how low it was in the golden age of the post-WWII era, one can see it below in the long-run graph of unemployment from 1870 to 1999. The data come from Boyer and Hatton (2002), but the graph simply omits unemployment statistics from the two World Wars.

In the 1945 to mid-1970s era there was full employment. But it was not only the Labour party that engaged in responsible economic management in these years. The Conservative party deserves credit too.

While one should not gloss over its limitations, nevertheless there was a perfectly respectable Conservative form of Keynesian economics in Britain after World War II, and the Conservative governments, by and large, also maintained full employment policies.

While Thatcherism shattered Tory Keynesianism, even under the Iron Lady the Tories had their own fratricidal battles between the “Wets” and “Dries.” The former were old-style conservatives like Sir Ian Gilmour and Jim Prior who opposed Thatcher’s monetarism and more extreme free-market ideology.

In fact, Sir Ian Gilmour is a case in point. What were his economics? His Guardian obituary describes his views:

“Ian Gilmour, the liberal Conservative politician, Lord Gilmour of Craigmillar, … died aged 81, served briefly as Edward Heath’s defence secretary and for two years as lord privy seal under the less congenial leadership of Margaret Thatcher …. his reputation rests less upon his time in office than on his longer term opposition to Thatcher and Thatcherism. His background as proprietor (1954-67) and editor (1954-59) of the Spectator, and his books, made him a different kind of Tory. He was also one of the most consistent, and constructive opponents of Ricardian free market economics and their social consequences to be found in parliament. …. He first attracted attention with his purchase of the somnolent Spectator in 1954 .... Gilmour’s Spectator was humanitarian in social matters, anti-adventure in foreign affairs and Keynesian in economics.
Edward Pearce, “Obituary: Lord Gilmour of Craigmillar,” Guardian, 24 September 2007.

Are there any conservatives like this in Britain anymore?

Could one, for example, find a British conservative in favour of a social democratic state, a “substantial” welfare system, “strong” employment rights, support for some revived form of council housing, and nationalisation of the railways?

It would appear that one such unconventional conservative is Peter Hitchens, the brother of the late Christopher Hitchens. On economics, Peter Hitchens appears to be very unusual for someone who is generally reckoned to be a conservative.

We can see this clearly in the video interview below where he elaborates on his economic ideas.



The economic ideas here are remarkable from a modern British Conservative.

Now no doubt many people on the left loath Peter Hitchens, and would jeer and sneer at him, for his various views: his conservative stand on religion, rather hard views on punishment of criminals, and support for the death penalty. I am not in favour of these things myself and am a person of the secular left, but it seems to me that the negative treatment Hitchens often receives from the left is grossly unfair, irrational, and infantile. The British left, for example, ought to be extremely concerned about the train wreck that is the EU, and leaving it may not be such a bad idea, if it continues to be such a disaster. Certainly adopting the Euro as a currency in Britain would be sheer madness. Even left-wing Modern Monetary Theory (MMT) economists regularly make the case that many peripheral European nations would be better off leaving the EU and Euro zone.

But to return to Hitchens. He is an underrated conservative commentator and – whatever you think about his politics – he is highly eloquent, unconventional, and thought provoking, and well aware of how disillusioned the general British public is with their two main parties, which have no substantive differences on many issues.

But now it is time for my main question.

In the video above, Peter Hitchens says he wants a state “heavily social democratic in social policy … that maintains a substantial welfare state” (at 31.41–31.55 in the video), and with “strong employment rights.” In his view, some kind of council housing is to be restored too. Hitchens even makes it clear that he was no Thatcherite (but agreed with her to some degree on trade unions). In his column he even calls for nationalisation of the railways (see also the delightful video of him here
bashing both New Labour and the Tories in a way that would make an old-style social democrat’s heart swell).

But the trouble here is the following: it is unclear how a government “heavily social democratic in social policy … that maintains a substantial welfare state” with “strong employment rights” is to be achieved. The fine details are missing.

Is Peter Hitchens advocating Keynesian economics? Does he want to see a Britain with full employment again?

The only effective economic theory for achieving anything like what Hitchens seems to want is Keynesian economic policy, the tried and tested system for successfully managing capitalist economies, which avoids the extreme errors and follies of Marxism and communism. As we saw above, Keynesianism used to be mainstream Conservative policy too.

Furthermore, the feeble mainstream neoclassical version of Keynesianism is not up to the task, but it is Post Keynesian economics that is required.

The crucial point is that – as far as I can see – unconventional conservatives like Hitchens just have not thought out their economic program. How are they going to respond to and refute the mainstream Conservative economists and Thatcherites who will tell them their economic program is unattainable and incompatible with neoclassical economic theory? That “strong employment rights” and “nationalisation of the railways” is contrary to (alleged) economic laws, wage flexibility, and so on and so forth?

A look through the comments section of Hitchens’ column and the blogosphere shows that his economic program at times provokes strong attacks on him from libertarians and other conservatives of the laissez faire persuasion. This is not surprising because (even though the fine details are not clear) his economic ideas have their natural home on the left, not the right.

How is he going to defend his economic ideas without a coherent economic theory? These are the questions that Conservatives who wish to return their party to a social democratic/Keynesian system need to think over very carefully indeed.

BIBLIOGRAPHY
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.

That “Liquidationism” Passage in Hoover’s Memoirs

By this, I mean what was full quotation and meaning of the passage in Hoover’s memoirs where Hoover rejected the hard form of liquidationism advocated by Andrew Mellon?

I set out the passage in full:

“The break in the stock market in late October, 1929, was followed by succeeding slumps until, by the end of November, industrial stocks had fallen to 60 per cent of their high point. Even so, the business world refused, for some time after the crash, to believe that the danger was any more than that of run-of-the-mill, temporary slumps such as had occurred at three-to seven-year intervals in the past.

However, we in the administration took a more serious view of the immediate future, partly because of our knowledge of the fearful inflation of stock-market credit, and, in the longer view, because of our fear of the situation of European economy. I perhaps knew the weaknesses of the latter better than most people from my experience in Europe during 1919 and my knowledge of the economic consequences of the Versailles Treaty.

Two schools of thought quickly developed within our administration discussions.

First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:

‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ He often used the expression, ‘There is a mighty lot of real estate lying around the United States which does not know who owns it,’ referring to excessive mortgages.

At great length, Mr. Mellon recounted to me his recollection of the great depression of the seventies which followed the Civil War. (He started in his father’s bank a few years after that time.) He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received time he got back, confidence was growing on every hand; suddenly the panic had ended, and in twelve months the whole system was again working at full speed.

I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago, when we were 75 per cent an agricultural people contrasted with 30 per cent now; that unemployment during the earlier crisis had been mitigated by the return of large numbers of the unemployed to relatives on the farms; and that farm economy itself had been largely self-contained. But he shook his head with the observation that human nature had not changed in sixty years.

Secretary Mellon was not hard-hearted. In fact he was generous and sympathetic with all suffering. He felt there would be less suffering if his course were pursued. The real trouble with him was that he insisted that this was just an ordinary boom-slump and would not take the European situation seriously. And he, like the rest of us, underestimated the weakness in our banking system.

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.

The record will show that we went into action within ten days and were steadily organizing each week and month thereafter to meet the changing tides—mostly for the worse. In this earlier stage we determined that the Federal government should use all of its powers:

(a) to avoid the bank depositors’ and credit panics which had so generally accompanied previous violent slumps;
(b) to cushion slowly, by various devices, the inevitable liquidation of false values so as to prevent widespread bankruptcy and the losses of homes and productive power;
(c) to give aid to agriculture;
(d) to mitigate unemployment and to relieve those in actual distress;
(e) to prevent industrial conflict and social disorder;
(f) to preserve the financial strength of the United States government, our credit and our currency, as the economic Gibraltar of the earth—in other words, to assure that America should meet every foreign debt, and keep the dollar ringing true on every counter in the world;
(g) to advance much-needed economic and social reforms as fast as could be, without such drastic action as would intensify the illness of an already sick nation;
(h) to sustain the morale and courage of the people in order that their initiative should remain unimpaired, and to secure from the people themselves every effort for their own salvation;
(i) to adhere rigidly to the Constitution and the fundamental liberties of the people.”

(Hoover 1953: 29–32).

So two groups existed in the Hoover administration:

(1) the hard liquidationists “headed by Secretary of the Treasury Mellon”, and
(2) a second group including President Hoover, Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde, who wanted to “use the powers of government to cushion the situation.”

But notice those words: “use the powers of government to cushion the situation.” Not “prevent,” “end,” or “reverse” the situation, but “cushion” or mitigate. This was not some announcement of interventions to stabilise GDP, real output or stimulate the economy, but mere measures to “cushion” or lessen its severity.

And the policy aims they advocated are very interesting.

If we strip out the actions that amounted to mere rhetoric (such as “sustaining morale”), we get these:

(a) to avoid the bank depositors’ and credit panics which had so generally accompanied previous violent slumps;
(b) to cushion slowly, by various devices, the inevitable liquidation of false values so as to prevent widespread bankruptcy and the losses of homes and productive power;
(c) to give aid to agriculture;
(d) to mitigate unemployment and to relieve those in actual distress;
(e) to prevent industrial conflict and social disorder;
(f) to preserve the financial strength of the United States government, our credit and our currency, as the economic Gibraltar of the earth—in other words, to assure that America should meet every foreign debt, and keep the dollar ringing true on every counter in the world;
(g) to advance much-needed economic and social reforms as fast as could be, without such drastic action as would intensify the illness of an already sick nation;
…
(i) to adhere rigidly to the Constitution and the fundamental liberties of the people.”

Once thing should be perfectly clear, measure (f) amounted to supporting the gold exchange standard, and was in conflict with the other proposed aims.

Aims (b) and (d) presuppose that a serious depression would occur, and Hoover never declared he wished to avoid depression or end such a depression quickly, just “cushion” or “mitigate” aspects of it. His main way of shunning “hard liquidationism” was merely mitigation of hardship and, above all, avoiding banking panics.

But were the aims and measures Hoover described actually carried out successfully? One can grant that (f) and (i) were more or less achieved.

But the other aims failed badly:

(1) the desire to stop bank runs and loss of deposits – or (a) – which must be judged a terrible failure since around 5,000 banks collapsed under Hoover and there was mass loss of deposits;

(2) there was severe asset price and commodity deflation, so the aim of (b) to “prevent widespread bankruptcy and the losses of homes and productive power” by some kind of “cushioning” was never achieved;

(3) some limited aid was given to farmers, but does anyone seriously think Hoover saved American agriculture from devastation?

(4) there might have been some mitigation of unemployment and relief to unemployed, but it was far short of what was necessary;

(5) America erupted into social conflict and disorder so (e) and (g) were failures.

Hoover’s commitment to saving the banking system was never fulfilled, and for all his announced good intentions, his open market operations were woefully inadequate.

In fact, Hoover essentially admitted this, when he said that Mellon,

“like the rest of us, underestimated the weakness in our banking system.”

Hoover’s aims could never be realised with the feeble and limited interventions he actually pursued, and (arguably) his commitment to the gold exchange standard.

And notice how Hoover never committed himself to any Keynesian solution to the crisis, never announced some massive fiscal expansion or doing “whatever it took” to stop the collapse. He explicitly said later that he utterly rejected the Keynesian solution:

“I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.” (Hofstadter 1968: 259–260).
http://newdeal.feri.org/court/hoover02.htm

So Hoover’s rejection of Mellon’s extreme liquidationism was very limited indeed in its aims, and his rejection of the many later aspects of the New Deal as radical and opposed to “liberty” simply precluded any real policies that could have stopped and reversed the depression.

Even when Hoover directed the state, local and federal governments to continue with public works spending he saw it mostly as a measure for “relief of distress” (Hoover 1953: 42), not to stimulate the economy. Indeed, in fiscal year 1930 (July 1, 1929–June 30, 1930), Hoover ran a federal government budget surplus, which contracted demand from the economy, which demonstrates that he had no understanding of basic Keynesian fiscal policy theory.

That is underscored in his memoir when he announced his disillusionment with the effects of the minimal public works programs (compared to GDP collapse) implemented to that point:

“The first limitation was that the construction and capital goods’ industries were the most sensitive to depression forces. They could mostly be postponed until another day. They could decrease by $8,000,000,000 per annum. To replace such volume with governmental public works would require that much of an increase in government expenses—or a rise of 400 per cent in the taxes of those times. Certainly such works as were possible proved to be no economic balance wheel in depressions.” (Hoover 1953: 144).

In other words, Hoover never saw public works spending as the way to make up for the private investment shortfall, and he implies that such spending would require tax increases. There was no Keynesian justification given for his public works.

Moreover, Hoover never abandoned a concern for a balanced budget. By 1932, he could write of “the urgent need of the country for prompt passage of the emergency legislation and balancing of the budget” through tax increases (Hoover 1953: 136).

And on 5 May 1932 he wrote a message to Congress “devoted solely to the necessity for balancing the budget as the next item on the recovery program”(Hoover 1953: 138; my emphasis). In this letter, Hoover wrote:

“Nothing is more necessary at this time than balancing the budget. Nothing will put more heart into the country than prompt and courageous and united action. ...

The details and requirements of the situation are now well known to the Congress and plainly require:

1. The prompt enactment of a revenue bill [i.e., tax increases]. ...

2. A drastic program of economy [i.e., austerity – LK] which, including the savings already made in the Executive budget of $369,000,000, can be increased to exceed $700,000,000 per annum. (Hoover 1953: 139).

In other words, a balanced budget and austerity were a fundamental part of his “recovery program”!


BIBLIOGRAPHY

Hofstadter, Richard. 1968. Ten Major Issues in American Politics. Oxford University Press, New York.

Hoover, Herbert. 1953. The Memoirs of Herbert Hoover. The Great Depression, 1929–1941 (vol. 3). Hollis and Carter, London.

Herbert Hoover Rejected Keynesianism

And he tells us explicitly that he did so in a speech in October 1936, when describing his time as president, recently cited by Daniel Kuehn in a really excellent post here.

I cite the full quotation below:

“During my four years powerful groups thundered at the White House with these same ideas [i.e., the ideas of Roosevelt’s New Deal – LK]. Some were honest, some promising votes, most of them threatening reprisals, and all of them yelling ‘reactionary’ at us.

I rejected the notion of great trade monopolies and price-fixing through codes. That could only stifle the little businessman by regimenting him under the big brother. That idea was born of certain American Big Business and grew up to be the NRA [National Recovery Act].

I rejected the scheme of ‘economic planning’ to regiment and coerce the farmer. That was born of a Roman despot fourteen hundred years ago and grew up into the AAA [Agricultural Adjustment Act].

I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.

I defeated other plans to invade State rights, to centralize power in Washington. Those ideas were born of American radicals.

I stopped attempts at currency inflation and repudiation of government obligation. That was robbery of insurance-policy holders, savings-banks depositors and wage earners. That was born of the early Brain Trusters.” (Hofstadter 1968: 259–260).
http://newdeal.feri.org/court/hoover02.htm

So there you have it.

Even though Hoover in his autobiography said that he had rejected the “hard liquidationism” of Andrew Mellon, he was also adamant that he “vetoed the idea of recovery through stupendous spending to prime the pump.”

And he was not lying as I have demonstrated again and again:

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.

“What Hoover Should have Done in 1931,” January 26, 2012.

“Steven Horwitz on Herbert Hoover: Mostly Misleading,” February 20, 2012.

BIBLIOGRAPHY
Hofstadter, Richard. 1968. Ten Major Issues in American Politics. Oxford University Press, New York.

US Inflation Rates (1946–1987), Keynesianism and Stagflation

It is sometimes claimed that the Keynesian golden age of capitalism (1946 to 1973) had an accelerating inflation rate. The story goes: all Keynesianism did was cause a never-ending, upward trend in inflation rates.

The myth was peddled by (of all people!) the British Labour politician James Callaghan (UK Prime Minister from 1976 to 1979) when in 1976 he declared that Keynesianism “only worked on each occasion ... by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step,” before he introduced at least a rhetorical commitment to a pre-Thatcherite form of monetarism in the UK.

But it is nonsense, certainly in the case of the US, as we can see in the graph below.




There were two outliers: the post-WWII inflation and the Korean War inflation. But, apart from these, the inflationary spike that did break out after 1968 was unusual and a deviation from the basic price stability of the golden age. That price stability was most notable for the late 1950s and most of the 1960s. In fact, actual deflation briefly occurred twice in the post-WWII era.

As Nicholas Kaldor long ago noted, during the golden age “for a long time the rate of inflation (as measured by consumer prices) remained moderate, and until the closing years of the 1960s it showed no clear tendency to acceleration” (Kaldor 1976: 214).

The reason for the inflationary crisis of the 1970s was four-fold:

(1) From 1968–1971 there were the beginnings of inflationary pressures, in both wages and prices in many industrialised nations. The fundamental cause was that around 1968–1969 in Japan, France, Belgium and the Netherlands and from 1969–1970 in Germany, Italy, Switzerland and the UK wage rises had occurred, which Kaldor attributes to strong action by unions (Kaldor 1976: 224). There is a perpetual struggle between capitalists and labour over distribution of income, and it just happened that around 1968 to 1970 labour won out in many countries causing a bout of cost-push inflation (via wage increases). But this would not have become a serious problem had it not been for factors (2), (3), and (4).

(2) the dismantling of commodity buffer stock policies that had previously ensured price stability. The prelude to stagflation was marked by a significant explosion in commodity prices that occurred in the second half of 1972. Part of the problem was the failure of the harvest in the old Soviet Union in 1972–1973 and the unexpectedly large purchases on world markets by the Soviet state. This could have been averted had the United States not dismantled its commodity buffer stock policies in the 1960s.

(3) The end of Bretton Woods (the post-WWII international monetary system) was momentous: inflationary expectations and instability on financial and commodity markets resulted, as well as a rise in commodity speculation as a hedge against inflation. This contributed to the cost-push inflation that was being felt in many countries after 1971.

(4) The final factor that caused the severe inflation of the 1970s was the first oil shock from October 1973, when various Middle Eastern producers of oil instituted an embargo that lasted until March 1974 (Kaldor 1976: 226). In most countries, the double digit inflation of the 1970s was caused by the oil shocks (both the first and second).

The unfortunate concatenation of these historically unprecedented shocks – that is, factors (1), (2), (3), and (4) – in toto was the cause of 1970s stagflation.

Kaldor stresses the importance of factor (2). During most of the golden age of capitalism (1945–1973), primary commodity buffer stocks had created stable prices. But this policy was changed in the 1960s when the US modified its buffer stock policies:

“… the duration and stability of the post-war economic boom owed a great deal to the policies of the United States and other governments in absorbing and carrying stocks of grain and other basic commodities both for price stabilisation and for strategic purposes. Many people are also convinced that if the United States had shown greater readiness to carry stocks of grain (instead of trying by all means throughout the 1960s to eliminate its huge surpluses by giving away wheat under PL 480 provisions and by reducing output through acreage restriction) the sharp rise of food prices following upon the large grain purchases by the U.S.S.R. [in 1972–1973], which unhinged the stability of the world price level far more than anything else, could have been avoided.” (Kaldor 1976: 228).

That was a major factor causing stagflation, along with wage–price spirals. The first oil shock was a final factor that exacerbated everything.


BIBLIOGRAPHY

Kaldor, N. 1976. “Inflation and Recession in the World Economy,” Economic Journal 86 (December): 703–714.

Murphy on Keynesianism and Great Recession

His views on the recent crisis in the US are given here.




The problems with his video are as follows:

(1) Romer’s estimates of the level of unemployment with stimulus were wrong, but given that you cannot precisely predict the future or do so with objective probability scores, this is hardly much of a point.

Romer and others underestimated the severity of the recession. This does not disprove the fundamentals of Keynesian theory.

The whole underlying argument of Murphy’s talk is that the stimulus “failed.” If this were so, then why did the US recession end in 2009 and positive real output growth resume? Failure would have been a continuing recession even in the face of fiscal expansion.

(2) It is fascinating how modern Austrians are now driven to extremes so absurd that they appear to deny that government increases in national income can raise output and employment.

In fact, not even Hayek or other die-hard Austrians have denied this. Take this statement by the extreme Rothbardian Huerta de Soto:

“What should be done if, under certain circumstances, it appears politically ‘impossible’ to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession.

Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:

it has, of course, never been denied that employment can be rapidly increased, and a position of ‘full employment’ achieved in the shortest possible time by means of monetary expansion. ... All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.

Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reduced wages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above.” (Huerta de Soto 2012: 452–456).

But these days neo-Austrianism appears to deny even this.

(3) What is important to note here is that Murphy attacks New Keynesianism, and has a poor understanding of Post Keynesianism.

(4) By 18.00 onwards Murphy starts to sound like a New Classical and requires Ricardian equivalence and rational expectations for his idea that people cut their spending as the stimulus was implemented in anticipation of future tax increases. But Ricardian equivalence and rational expectations are not even supported by Austrian economics, and one can only marvel at the breath-taking hypocrisy here.

(5) Regarding predictions and the real world: the trouble with libertarians is that they are so focussed on the US, and rarely look at the rest of the world. In numerous other countries, governments used countercyclical fiscal policy and ended their recessions and kept unemployment low: e.g., Australia, Norway, South Korea, and Germany. Of course we hear not a word about any of this from Austrians like Murphy.

(6) Regarding the success of Keynesianism in the 1930s, Murphy is ignorant. There were nations in the 1930s that successfully used 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.

(7) Murphy’s analysis of the Eurozone is flawed.

Murphy’s main point appears to be that Europe has not cut enough from government spending. He grudgingly admits that in Greece, Spain and Ireland total spending has been cut, and economic problems have persisted. Strangely, he ignores the countries that pursued much more extreme austerity: Latvia, Estonia and Lithuania. What happened there is confirmation of the disastrous consequences of fiscal contraction.

Murphy attacks bank bailouts in Europe. At this point, the bizarre nature of Murphy’s Austrian analysis reveals itself. Throughout his talk, Murphy is trying to suggest that austerity and liquidationism will cause recovery better than recoveries caused by fiscal expansion: yet allowing the financial sector to collapse is precisely a measure that would induce the worst depression imaginable.

Liquidationism by definition means the worst types of recessions/depressions possible.

Rise of the Robots?

Yes, this is already the title of a recent post by Krugman here:

Paul Krugman, “Rise of the Robots,” December 8, 2012

I have to say I feel rather vindicated, since I made similar points over two years ago in this post:

“Automation and Robotics: The Future of Manufacturing?,” September 12, 2010.

Krugman notes that the strong trend towards industrial automation is good news for American manufacturing. Indeed, it is, and we can expect to see some return of manufacturing to the US and Western nations from East Asia and other developing, low wage countries. As Krugman says, robots “mean that labor costs don’t matter much, so you might as well locate in advanced countries with large markets and good infrastructure.” This means that the US should see a fall in its unbalanced trade deficit with other nations.

But what about the possible problems it will cause? Firstly, I want to qualify everything I say below with the clear statement: I do not oppose the trend to automation; I welcome it. Labour saving machinery was the key to the industrial revolution and the many increases in productivity growth we have seen over the past two centuries. The problem is that a new era of mass automation requires macroeconomic policies to deal with its perverse negatives consequences.

The media already reports that some economists think mass automation might not necessarily benefit everyone, but the analysis there is poor because it is based on the fantasy of neoclassical general equilibrium models.

In contrast, Krugman focuses on the implications for income distribution: away from workers to capital. First, the wealthy have a lower marginal propensity to consume (or alternatively a higher marginal propensity to save), and they are likely to buy financial assets on secondary markets with their extra money, not final goods and services.

Secondly, America and many Western nations already have a chronic unemployment problem, which, without proper fiscal expansion, will continue for years. What will happen when that persistent unemployment problem is exacerbated by large-scale structural unemployment owing to mass automation in industry?

Factors (1) and (2) above already strongly suggest a serious aggregate demand shortfall in the future. Keynesian demand management and income distribution are going to be more important than anyone ever dreamed. Government must step in and provide employment programs or funds to employ those who are unemployed and who seek employment. (In fact, structural unemployment induced by technology was already a problem in the 19th century and even as strong a defender of laissez faire as Jean-Baptiste Say – the inventor of Say’s law – advocated public works as a solution to such unemployment. See Appendix 1 below.)

No doubt additional jobs will be created in new private businesses, but it is unlikely to be enough. Free markets do not guarantee full employment, nor does Say’s law work. Employment in tradable goods and services in many countries will probably fall dramatically. Our employment future will probably be mainly in services, education, and most probably in employment programs funded by government or in government-sector jobs. There will probably be a great reduction in the hours that people need to work as well and more leisure.

It might well be that much of the government-funded labour force will be in education (e.g., universities), sciences, research and development, or other services. I suspect a much greater labour force working in basic sciences and applied R&D would mean a much more rapid advancement of science and technology too – a virtuous circle.

As we move down the route of radical automation in the course of this century, equally radical Keynesian demand management will be necessary to maintain demand for goods and services, income equality, and continuing rises in living standards.


Addendum
Some other points that occur to me as an afterthought:

(1) Eventually automation and structural unemployment will affect even services. Artificial intelligence is not far fetched, and it is undoubtedly the way of the future. Already when you ring some companies you can find voice recognition software doing the work of people.

(2) Perhaps we will see a very strong deflation in the prices of many industrial goods, especially those where at present high wages are a major factor input cost.

(3) Some more relevant news and commentary here:

Paul Krugman, “Robots and Robber Barons,” December 9, 2012.

Christopher Matthews, “Can Robots Bring Manufacturing Jobs Back to the U.S.?,” Time.com, September 27, 2012.


Will Knight, “This Robot Could Transform Manufacturing,” MIT Technology Review, September 18, 2012.

Vivek Wadhwa, “The End of Chinese Manufacturing and Rebirth of U.S. Industry,” Forbes.com, 23 July, 2012.

APPENDIX 1: SAY ADVOCATED PUBLIC WORKS AS A SOLUTION TO UNEMPLOYMENT INDUCED BY TECHNOLOGY

In his discussion of the introduction of labour saving machines, Say recognised that this would create short term unemployment, and in a footnote actually advocated public works spending by government:

“Without having recourse to local or temporary restrictions on the use of new methods or machinery which are invasions of the property of the inventors or fabricators a benevolent administration can make prevision for the employment of supplanted or inactive labour in the construction of works of public utility at the public expense as of canals, roads, churches or the like …” (Say 1832: 87).

This must come as a shock to Austrians and libertarians who so frequently cite Say’s law with approval.


BIBLIOGRAPHY

Say, J. B. 1832. A Treatise on Political Economy; or, the Production, Distribution, and Consumption of Wealth (4th edn; trans. C. R. Princep and C. C. Bibble), Grigg & Elliott, Philadelphia