Thursday, August 9, 2012

What was the Greatest Mistake of Lionel Robbins’s Life?

The short answer, according to the man himself, was his support for the Austrian business cycle theory:
“I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see be forgotten.” (Robbins 1971: 154).
The Austrians make much of the success that Hayek gained at the London School of Economics (LSE) in the early 1930s with his business cycle theory, but pay less attention to the fact that the leading supporter of Hayek there repudiated the theory.

Robbins made this now famous statement:
“Now I still think that there is much in this theory as an explanation of a possible generation of boom and crisis. But, as an explanation of what was going on in the early ’30s, I now think it was misleading. Whatever the genetic factors of the pre-1929 boom, their sequelae, in the sense of inappropriate investments fostered by wrong expectations, were completely swamped by vast deflationary forces sweeping away all those elements of constancy in the situation which otherwise might have provided a framework for an explanation in my terms. The theory was inadequate to the facts. Nor was this approach any more adequate as a guide to policy. Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and the easing of capital markets by fostering the disposition to save and reducing the pressure on consumption was completely inappropriate.

To treat what developed subsequently in the way which I then thought valid was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.” (Robbins 1971: 154).


Robbins, Lionel. 1971. Autobiography of an Economist. Macmillan, London.


  1. Yes, I think a lot of us can say that we could look back at our old anti-stimulus arguments and wonder, "What were we thinking?!"

    A lot of politics could be seen as a divide between interests of various groups. A zero sum game, so to speak.

    But stimulus packages during recession are different. Having or not having good counter-cyclical policies is something that either makes **everyone** better off or makes **everyone** worse off. There is no friction between special interest groups here - nobody ever benefited from lack of demand during recession. Neither the wealthy nor the poor, neither the private sector nor the public sector.

    1. While that is true, inequality is getting worse in most countries after the crisis. This means that although the overall pie is smaller, those at the top get a bigger proportionate slice. If some of these people think in relative terms -- i.e. my wealth is important in relation to the wealth of others -- then they are indeed better off.

      Is this the case? To some extent, I think, yes. Is this the cause of the hostility to stimulus? Almost certainly not.

  2. How about not having restrictions on branch banking to prevent so many US bank failures during the Depression and the resulting contraction of the money supply? (USA: 9,000, Canada: zero)

    Oh, wait I forgot--all forms of deregulation are bad, only govt solutions work. Please forgive my thoughtcrime.

    1. (1) It is not my view that "all forms of deregulation are bad, only govt solutions work" - this is a stupid straw man.

      (2) As for Canada in the 1930s, it was government intervention and implicit guarantees that provided banking stability for Canada during the Great Depression. The modern Canadian central bank – the Bank of Canada – did not exist until 1935, but the large and powerful Bank of Montreal appears to have functioned as a de facto central bank for Canada from the 1860s until 1935.

      (3) Australia had no restrictions on branch banking, but it too suffered a severe recession in the 1930s, which does not support your case.

    2. (1) I doubt you've written even one post extolling the benefits of free markets or pushing for less govt interference in the economy. Even if you have, such posts certainly make up less than 1% of the total.

      (2) & (3) Empirical evidence shows that allowing branch banking led to fewer bank failures during the Depression both among US states and countries:

  3. Lord keynes, do you have a source on the bank of Montreal in the gilded age? I am quite curious about canada. Thanks.

  4. Patch@August 9, 2012 11:09 AM

    (1) "Canada united as a confederation in 1867, and Bank of Montreal expanded west. During the 1860s, it became Canada's de facto central bank until the 1935 creation of the Bank of Canada. By 1914 Bank of Montreal was the nation's largest. It bought the British Bank of North America (1918), Merchants Bank of Canada (1922), and Molsons Bank (1925)."

    (2) Douglas McCalla and Michael Huberman, Perspectives on Canadian Economic History, p. 265:

    "Third, the Bank of Montreal (founded in 1817) emerged very early as the government's bank performing many central bank functions."

    (3) Canada's Entrepreneurs: From The Fur Trade to the 1929 Stock Market Crash:

    "They also augmented the bank's influence on government policy; in fact, Clouston came to view his bank as Canada's central bank, and, as Marchildon remarks, ..." etc.,+and,+as+Marchildon+remarks,%22&source=bl&ots=ciBTdHCqMI&sig=vXw_VnpLhS4gTGsDbc8mKd4WymI&hl=en&sa=X&ei=rv8jUOKVI8ygmQWw0YGoAQ&ved=0CDMQ6AEwAA#v=onepage&q=%22his%20bank%20as%20Canada%27s%20central%20bank%2C%20and%2C%20as%20Marchildon%20remarks%2C%22&f=false

    For government interventions to stabilise Canada's financial system pre-1930:
    (4)Charles Goodhart and Gerhard Illing (eds.), Financial Crises, Contagion, and the Lender of Last Resort: A Reader, p. 121:

    "However, the Bank of Montreal (founded in 1817) very early became the government's bank and performed many central bank functions. Because Canadian banks kept most of their reserves on 'call' in the New York money market, they were able in this way to satisfy the public's demand for liquidity, again precluding the need for a central bank.
    On two occasions, 1907 and 1914, however, these reserves proved inadequate to prevent a liquidity crisis and the Government of Canada had to step in to supplement the reserves.

  5. Michael D. Bordo and Anna J. Schwartz (eds.), A Retrospective on the Classical Gold Standard, 1821-1931, p. 308:

    "Bordo asked about the role of the Bank of Montreal and other large Canadian commercial banks in this period. He thought that in some ways the Canadian experience may have been similar to the experience of the United States in the early part of the nineteenth century ... In particular, having a large commercial bank committed to the maintenance of convertibility may be sufficient to ensure the stability of the system."

  6. Michael D. Bordo and Anna J. Schwartz (eds.), A Retrospective on the Classical Gold Standard, 1821-1931, p. 278:

    "The Bank of Montreal acted as the government's fiscal agent and on rare occasions performed some central-banking functions (for example, during the financial crisis of 1907)."

  7. In 1907, the government through The Bank of Montreal acted as a lender of last resort.

    Georg Rich, The Cross of Gold: Money and the Canadian Business Cycle, 1867-1913, p. 33:

    "Notably, the Bank of Montreal, Canada's largest financial institution before World War I, played a unique role in the Canadian financial system. The Bank accounted for one-fourth to one-fifth of aggregate chartered-bank assets (Neufeld, 1972, Table 4:6), acted as Canada's principal foreign exchange dealer, served as fiscal agent to governments (see Chapter 7), and provided banking services to other banks."

  8. See also:

    Charles W. Calomiris, U.S. Bank Deregulation in Historical Perspective, p. 17ff.:

    "The Bank of Montreal - the depository of most government funds, and the largest of the Canadian banks, with 20 percent of the banking system's assets in 1910 - sometimes acted as a private lender of last rsort, stepping in to assist troubled banks."

    Kryzanowski, Lawrence, and Gordon S. Roberts. 1993. "Canadian Banking Solvency, 1922-1940," Journal of Money, Credit, and Banking 25: 361-376.

  9. On why Canada did not see a financial sector meltdown from 1929-1933, because of implicit government guarantees and interventions:

    Kryzanowski, Lawrence, and Gordon S. Roberts. 1993. "Canadian Banking Solvency, 1922-1940," Journal of Money, Credit, and Banking 25: 361-376.

    p. 373:

    "This paper challenges the accepted view ... that diversification benefits from national branching kept Canadian banks solvent and prevented runs and failures in the 1930s ... Under our alternative hypothesis, the better failure performance of Canadian versus U.S. banks is attributed to the Canadian government policy of forbearance through implicitly guaranteeing all deposits at par, primarily by standing ready to lend to banks and by facilitating the merger of troubled and healthier banks. ... after a major bank failure in 1923 and several "forced" mergers of "failing" banks in 1921-1923 (and 1931), this policy provided an implicit guarantee that no other bank would be allowed to fail and cause losses to depositors."

  10. Nice! Thanks so much.