Tuesday, May 29, 2012

Thomas E. Woods on Keynesian Predictions vs. American History: A Critique

Thomas E. Woods in the video below attempts to debunk Keynesianism. But his attack mostly falls flat on its face.

The trouble with this Austrian balderdash is as follows:
(1) The first part of the video focuses on the post-war economic period after 1945.

Thomas E. Woods asserts that there was no depression after 1945 (11.30), contrary to what some Keynesians (like Paul Samuelson) predicted. In actual fact, if depression is defined as a collapse in real output of 10% or more, then there was a sui generis depression after WWII, which is easily verified in the real GDP data:
Year | GDP* | Growth Rate
1941 | $1,366,100 | 17.07%
1942 | $1,618,200 | 18.45%
1943 | $1,883,100 | 16.37%
1944 | $2,035,200 | 8.07%
1945 | $2,012,400 | -1.12%
1946 | $1,792,200 | -10.9%
1947 | $1,776,100 | -0.89%

1948 | $1,854,200 | 4.39%
1949 | $1,844,700 | -0.51%
1950 | $2,006,000 | 8.74%
* Millions of 2005 dollars
Now certain Keynesians like Samuelson were right in saying the end of the war would lead to a sharp drop in real output, but wrong in predicting a long-term unemployment problem or a lack of private sector demand after 1945.

Woods even tells us (at 15.20) that “Keynesian economists everywhere ... [sc. were] predicting disaster and depression” to occur after WWII. Woods is wrong, and laughably wrong.

In 1943 — the same year Samuelson got it wrong — Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’s reply is significant:
“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem.” (Colander and Landreth 1996: 202).
Woods, like other Austrian ideologues, seems utterly ignorant of this. What kind of analysis of the post-war boom ignores what Keynes — the founder of Keynesian economics — thought about this question? The truth is that Samuelson was simply wrong; Keynes was right.

(2) Woods derides the idea that the boom of 1946 to 1948 was caused by the “pent up demand.” He then commits a laughable error by saying that Keynesians simply explain this pent up demand by consumer spending alone. This is utter nonsense: the liberation of demand after 1945 was both a private sector investment and consumer boom, and that is entirely consistent with Keynesian economics. Consumer spending, of course, helped to drive investment, but was only one side of the story. Corporate dissavings were used to finance investment after 1945, and the massive pent-up housing demand was an important factor. Although I have not looked at the figures, I suspect that exports also played a role in the boom. In general, see my post here.

(3) Woods ignores the actual fiscal history of the 1948 to 1950 period. The US government did in fact step in after 1948 to provide macroeconomic stability: the boom of 1948 gave way to a recession from November 1948 to October 1949.

Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP. Moreover, Congress had pushed through a tax cut in 1948, which boosted private spending in 1949. What we have here is classic Keynesian countercyclical fiscal policy. Some of the increases from 1950–1953 were, of course, related to the Korean war, but also to new social, welfare and military programs enacted under Truman. Government spending in both absolute terms and as a percentage of GDP surged from 1948 to 1953, fell slightly from 1953–1954 as the Korean war ended, but remained between about 25% and 30% of GDP throughout the classic era of Keynesian economics (1945–1973) – an unprecedented level to that point in American history. And the economy boomed.

(4) Woods takes a dig at Samuelson’s rather stupid predictions about the Soviet Union, which were indeed wrong, but this proves nothing about Keynesianism in the developed world. Keynesians support mixed economies, where there is a vast space for private sector production. And while the Soviet Union was a horrendous and immoral system that ended in the 1980s in severe economic problems, there is no doubt that it did have real output growth and real per capita GDP growth right up until the early 1970s.

(5) Woods attacks the idea of fiscal stimulus, but uses the Austrian business cycle theory. This theory is false and see my posts here on why it is false:
“Austrian Business Cycle Theory: Its Failure to explain the Crisis of 2008,” October 18, 2010.

“The Natural Rate of Interest: A Wicksellian Fable,” June 6, 2011.

“Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest,” June 18, 2011.

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

“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT,” December 27, 2011.

“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012.

Colander, D. C. and H. Landreth (eds). 1996. The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics, E. Elgar, Cheltenham.


  1. It should really be noted that low long term interest rates were maintained in the UK & US post WW2, enabled by the BW mechanism. This is a big reason there was such a high level of public investment.

  2. Tom Woods attempts to debunk Keynesianism and Tom Woods falls flat on his face?

    You should really try to make your posts less redundant LK.

  3. LK,

    Real GDP increase nearly 50% from 1941 to 1945. What was the cause of the increase? Do you have specifics in terms of what made up GDP in terms of units and dollars by categories suches as tanks, cars, houses, aircraft carriers? Was it mostly related to militarily expenditures and if so what percentage? I believe that GDP is a good starting point but one must get into the details as to what makes up GDP and why was there a increase in those specific items to have a clear picture in term of how that number effect the standard of living of individuals. Also what was the cause of the decrease the following year by more than 10%, also in line with what was said before in terms of specifics.

    1. Year | GDP* | Growth Rate
      1939 | $1,072,800 | 8.07%
      1940 | $1,166,900 | 8.77%
      1941 | $1,366,100 | 17.07%
      1942 | $1,618,200 | 18.45%
      1943 | $1,883,100 | 16.37%
      1944 | $2,035,200 | 8.07%
      1945 | $2,012,400 | -1.12%
      1946 | $1,792,200 | -10.9%
      1947 | $1,776,100 | -0.89%

      The surge in real output was, of course, to a great extent the result of the surge in production of war material by the US command economy. Has anyone ever doubted this?

      The fall in real output from 1945 was the result of the end of the wartime production economy.

    2. And as such, it meant a transfer of productive activity from war materials to consumer goods. Sounds like a good thing to me, not any disaster. Since there was no high unemployment, what is the problem?

    3. Go to 13:19 in the video, and he actually addresses this big drop in growth. He argues, based on some pretty good facts, that 1946 was a very GOOD year. Production of consumer goods increased 30%. The 10.9% drop was because of a decrease in war production. So this is a VERY good time, especially with the low unemployment.

  4. I can't listen to the whole thing anytime soon. Can you point me to the part where he talks about pent up demand?

  5. His remarks about "pent up demand" occur from 11.30 onwards.

    He is wrong yet again in asserting that Keynesians "changed their story" and switched to the "pent up demand" explanation only after the boom of 1946 was in progress.

    In fact, Paul Samuelson already foresaw in 1943 that pent up demand (or what he called “deferred demand”) would be a source of post-WWII growth (see Paul A. Samuelson, 1943. “Full Employment after the War,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. p. 52), but argued that this would fade out after 18 months to 2 years – not an unreasonable assessment at all.

    See my post here:


  6. This is complete nonsense. You cite government GDP statistics, even though Woods explains that government GDP means nothing when the whole economy is put under state management, as it was during the war years.

    The GDP fell drastically in 1946 because 2/3 of the Federal budget was cut due to demobilization.

    The USSR had great GDP numbers too, you know, which prompted Paul Samuelson to insist for almost TWENTY YEARS that the USSR was going to overtake the US economically.

    This is the nonsense you get when you only look at government figures. Your attempt to "debunk" Woods is embarrassing even by Keynesian standards, and that is saying a lot.

    I suppose you agree with Alvin Hansen that the Federal government should have continued building warships and munitions for years after the end of the war too?

    Next time, you might want to refrain from referring to someone who as late as 1989 was convinced of the USSR's supremacy...

    1. Though I suspect you're an ignorant troll, who will never come back after posting your rant above, nevertheless:

      (1) If Woods thinks GDP is "nonsense", then he has destroyed the basis on which to make his claim that there was a "boom" after WWII.
      Also, his other claims made elsewhere about the 19th century.

      Austrian idiocy on GDP like yours backfires in your face and wipes out your own arguments.

      (2) I am well aware that official Soviet GDP can't be trusted.

      US GDP on the hand was not fraudulent like Soviet stats. If you think US GDP is, then prove it.

      (3) Samuelson's wrong predictions about the Soviet Union don't invalidate anything I say above.

      And if you're trying to say that everything Samuelson said must be wrong because he made some stupid predictions about the Soviet Union, then you commit the ad hominem fallacy, which simply suggests that you're an intellectually bankrupt idiot like most other Austrian trolls.