We’re all Austrians now . . . make that Keynesians.

I plan to discuss a very impressive (unpublished) paper from 1991 written by Ronald W. Batchelder and David Glasner.  Then I hope to use this paper as a springboard to re-think the evolution of 20th century macro.  With apologies to Mr. Batchelder, I will refer to “David’s ideas” for simplicity.  (I know David, and he provides some excellent comments to this blog.)  David and I also share similar views on monetary policy, and in many cases he published his views first.  Unfortunately, the paper I refer to is not available on the internet.

The paper focuses on the views of Ralph Hawtrey and Gustav Cassel, two unjustly neglected interwar economists.  Both economists favored an international gold standard, but both were also concerned that the post-WWI system was potentially unstable.  During WWI many countries sold off their gold stocks to help pay for the war.  This big drop in the demand for gold caused the value of gold to plummet, which meant that the price level more than doubled.  Some of that was reversed in the 1920-21 deflation, but Cassel and Hawtrey feared that as countries rebuilt their gold stocks the price level might fall, causing higher unemployment.  They favored policies that would economize on the use of gold, such as replacing gold coins with gold-backed paper money.  Another idea was to supplement gold reserves with some sort of international accepted currency, such as the dollar and/or the pound.  And some of these reforms were implemented.

At first it looked like their fears were overblown.  Throughout most of the 1920s, prices in terms of gold were fairly stable.  After 1929, however, their worst fears came to pass.  Both central bank and private hoarding of gold caused severe deflation throughout most of the world, leading to mass unemployment.  So why didn’t they get credit for their predictions?  Why aren’t they famous today?  It turns out that the answer is surprisingly complicated, and tells us a lot about how macroeconomics evolves over time.

Hawtrey and Cassel were actually part of a broader tradition, which I’ll call “progressive.”  These economists favored using monetary policy to stabilize the economy, generally through a price level target.  Fisher and Keynes also held these sorts of progressive views, although they did not support the international gold standard.  Fisher wanted to adjust the price of gold each month to prevent changes in the price level.  Keynes’ views are a bit harder to pin down, but he generally favored a stable price level as a domestic policy objective, and what might be called a Bretton Woods-type international monetary system.  Gold would still be in the background, but countries could revalue or devalue when the exchange rate constraint conflicted with domestic stabilization objectives.

I believe that the views of these four progressive economists, who were also arguably the 4 best monetary theorists of the interwar period, are roughly analogous to the position occupied by the top new Keynesian economists of the 1990s and early 2000s.  Think of Fisher as a modern American new Keynesian, with a closed economy focus.   Cassel and Hawtrey would be closer to Mundell, someone with a more international perspective.  And Keynes would be somewhere in between.

However, they point out that by 1930 all four of them had been eclipsed by another economist—-Hayek.  Here is how they describe his impact:

Moreover, the Austrian theory achieved an enormous breakthrough in 1930, when Hayek, at the invitation of Lionel Robbins, gave four lectures on monetary and business-cycle theory at the London School of Economics.  Greatly impressive both for their command of the history of monetary theory and for their analytical brilliance, the lectures caused an instant sensation in the British economics profession, leading to Hayek’s being awarded a chair at LSE in 1931 and to their publication as Prices and Production in the same year.

A warning to my Austrian readers; I am going to describe Austrian economics not as someone like George Selgin would describe it today, but more as it was perceived by those who listened to the 1930 lectures, and also in line with much of the pop-Austrian stuff floating around on the internet today.  According to this view, the Fed made a mistake by adopting a low interest rate policy in 1927.  The Fed wanted to help the UK, and keep US prices from falling, but they merely succeeded in blowing up a big stock market bubble.  In the long run these speculative excesses led to malinvestment and a crash.  The crash was necessary to purge the excess from the system and allow resources to be reallocated.  David likes Hawtrey and Cassel’s views much better, and notes that it may seem “surprising” that these views were eclipsed by the Austrians:

Though the timing may be only coincidental, the influence of Hawtrey and Cassel on monetary policy seems to have declined after 1927 as the Austrian analysis became increasingly well known.   Surprising as it may now seem, the deflationary policy implications of the Austrian business-cycle theory attracted a following among many policy makers, among groups in the population who were morally offended by the greed, speculation, and financial excesses of the 1920s, and by powerful creditor interests concentrated in the major banks that had an enormous financial stake in a reduced price level (Temin 1990, Batchelder and Glasner 1991).

I’m going to argue that it wasn’t surprising at all.  I think the Austrian story is very appealing (although ultimately I will argue it isn’t quite right.)  People who followed the events of the late 1920s and 1930, especially people with conservative temperaments, probably found the Austrian story to be extremely persuasive.  All the speculative excesses of the 1920s built on cheap money, and then the hangover when you have to pay the piper.  There must be a million literary analogies to this sort of story.  But here’s something that is very surprising, only two years later the entire Austrian analysis was rapidly sliding into disrepute.  And here’s something that is still more surprising, the profession did not suddenly wake up and return to the progressive tradition of Cassel and Hawtrey (and Fisher, Robertson, Keynes, Wicksell, etc.)  Instead, Austrian economics was eclipsed by a third school of thought, and one that hadn’t even existed in 1930.

David has a pretty convincing explanation for the decline of Austrian economics.  In 1930 Hayek had indicated that recession and deflation was an unfortunate price that had to be paid for the previous excesses.  Later Hayek acknowledged that the deflation went much too far, but at the time the Austrian school was increasingly associated with reactionary policies, just as the severity of the Great Depression was pushing people toward government activism as a solution.  In their paper they suggest that 1932 was a turning point, the year when Keynes moved away from his 1920s-style views, to a very different perspective.

Here I’d like to break away from David’s paper, and discuss what I think happened in 1932.  Before doing so, let’s think about three ways of visualizing monetary policy during a deflationary recession like 1930:

1.  Progressive/new Keynesian:  Use monetary policy to boost prices and/or AD, in order to stabilize the economy

2.  Austrian:   Run a passive monetary policy as any attempt to prop up the economy would merely cause an ever greater crash later on.

3.  Keynesian:  An expansionary monetary policy would be nice, but monetary policy is ineffective in a depression with falling prices.  You can lead a horse to water . . .

Of course these are crude charicatures, especially for the Austrian view.  But I do think they capture three basic ways of thinking about the problem.  It is clear that in 1932 Keynes moved from 1 to 3, and within a few years much of the profession followed him.  The question is why.

I’d point to three reasons.  First the UK devalued in September 1931, and by 1932 it was clear that this action would not be enough to quickly restore prosperity to Britain.  David argues that this weakened the Cassel/Hawtrey explanation for the Depression, which focused on problems with the international gold standard.  I would also point to the large US open market purchases conducted in the spring of 1932, which failed to revive the US economy.  And finally, interest rates fell to very low levels in 1932, another indication that monetary policy was accommodative but impotent.

I think Keynes was wrong about almost everything.  Britain was helped by the devaluation, but also faced enormous structural problems, rigid labor markets, and a world economy that continued to be very weak.  The failed Fed open market purchases, which were cited by Keynes in the GT as an example of a liquidity trap (called absolute liquidity preference in the GT) were actually an example of the constraints of the international gold standard.  And of course low interest rates aren’t easy money; they are an indicator of deflationary monetary policies.  Nevertheless, Keynes views were much more appealing than mine, I know this because I have had a million arguments over the last year, and people keep throwing Keynes’ perspective back at me in conversation.

So here is my argument.  It’s all about the zeitgeist.  Maybe I overuse this concept, but I really think it explains an awful lot.  No matter how good the progressive arguments were in the 1920s, they simply could not overcome the powerful story provided by the Austrians in 1930.  Everyone accepted the Austrian story, because they already believed it in some sort of deep (Jungian?) sense.  It confirmed their prejudices.  Trying to hold it back with academic arguments was like trying to stem the tide.

But again, it didn’t last long.  Perhaps if the Depression had ended in 1930 then by 1932 Keynes might have said; “We’re all Austrians now.”  But it didn’t, it was much longer than normal business cycles, and thus you had the amazing spectacle of not one but two new zeitgeists appearing almost back to back.  By 1932 almost everyone was pessimistic about monetary policy.  I read a lot of conservative newspapers from that era, and was struck by how often conservative pundits would mock the idea that monetary policy could stop the Depression.  The failed 1932 OMOs were always thrown in the face of the progressives.  There was a sort of “we tried printing lots of money and it didn’t work” perspective that had become conventional wisdom by mid-1932.  And note that these articles were written 4 years before the GT introduced liquidity traps and by people that hated Keynes even more than they disliked the progressives.

So when Keynes introduced his new ideas about monetary policy in 1936, he didn’t have to try very hard to convince people.  He found a very receptive audience that already believed much of what he was preaching.  All he had to do was point out that if you are in a liquidity trap, all kinds of crazy things are possible.  (Check out this very funny Wilkinson post.)

Take a look at the paragraph I quoted where they explained the mindset of people who adopted the Austrian view in 1930.  How would you test my theory that the zeitgeist  explains Hayek’s initial success?  In 1991 I would have held out little hope that a test was possible.  Think about what would be required.  You’d need an “easy money” policy (i.e. low nominal rates) that was highly controversial.  Then you’d need that policy to be followed by a big asset bubble.  Then you’d need the bubble to burst and lead to falling NGDP.  And all this would somehow have to produce a surge in popularity for Austrian economics.

But in 1991 we hadn’t had that set of events in over 60 years.  And even when we did have a massive stock bubble in 2000, it was not preceded by ultra low interest rates, nor was it followed by falling NGDP.  But then it all came together.  The highly controversial low interest rate policy of 2003-04, aimed at preventing deflation.  The massive housing bubble and collapse.  And then in 2009 the biggest fall in NGDP since 1938.

And what happened?  How did my zeitgeist story hold up?  Well just in the past few weeks I have run across three conservative economists who expressed a new and sudden interest in Austrian economics.  Where is that interest coming from?  The zeitgeist.  It is in the air.  And if this time we don’t have a Great Depression, if the recovery continues, it is possible that the Austrian view may take hold.   Will we soon “all be Austrians now?”

But that’s not all.  Remember my story about how merely two years after Austrian economics went into severe decline, the formerly dominant progressive tradition also faded away, and both were replaced by Keynesian economics?  Now think about the following.  Inflation became the big problem in the post-war period, and economists stopped worrying about liquidity traps.  New Keynesian economists ruled the roost.  By the late 1990s most of the best monetary economists were basically new Keynesians, especially the Krugman/ Svensson/Woodford/Bernanke quartet at Princeton.  So you might assume that when the Austrians roared back in the wake of the subprime fiasco, with their highly persuasive stories that played on our deepest instincts, they would have been battling it out with the new Keynesians.  Not so, as Arnold Kling points out the new Keynesians just sort of quietly folded up shop.  They simply disappeared, they went into hiding.  The minute interest rates hit zero all the well-thought out solutions to liquidity traps, developed by people such as the Princeton 4 mentioned above, seemed to be either forgotten or ignored.  Instead the old Keynesian tradition roared back to re-fight the battles of the early 1930s.  Who will win?  Let’s hope the Austrians, as if the Keynesians win that means we would have had an extremely long and deep recession.

Let’s talk about two interesting figures from the early 1930s, and see if you can spot the modern equivalents:

1.  Keynes started as a mainstream progressive, favoring the use of monetary policy to stabilize the business cycle.  He favored using interest rates as a policy instrument.  He went through a sort of midlife crisis in 1932, and he later indicated that while he used to believe monetary policy was always the best way to stabilize the economy, he no longer believed that.  Does this sound familiar yet?  His views could be maddeningly hard to pin down, and were somewhat more complex and subtle than those of his followers.  Sometimes he would appear to favor an expansionary monetary policy, but a week later you could find him saying that monetary policy was ineffective at low interest rates.  Before I had this blog I used to sometime criticize Keynes in emails to a friend of mine who likes Keynes.  He kept insisting that I was wrong about Keynes, and would point to passages in the Treatise showing Keynes wasn’t as clueless about monetary policy as I kept alleging (based on my reading of the GT.)  If you follow my comment sections you may know where I am going.

Keynes was also a great writer, with a very persuasive style.  His supporters loved him, but beware if you were on the receiving end of his pointed barbs.  He was the leading liberal intellectual among economists.  Still don’t have it?  OK, one last clue, his name starts with “K.”

2. Now let’s talk about George Harrison.  I am afraid I know much less about him and perhaps my memory may less than perfect.  So please correct me if I am in error.  I recall that when Strong headed the Federal Reserve Bank of NY, Harrison was second in command.  Harrison was supportive of Strong’s activist stance.  Strong favored a policy of stabilizing the economy, and tried to use monetary policy to offset cyclical changes in prices and output.  He was a “flexible inflation targeter.”  After Strong died in 1928, (one year before the bubble burst!!) Harrison took over, and became the most important policymaker in the Fed (which was more decentralized at the time.)  He acted very aggressively during the stock market crash.  In early 1930 he was unsuccessful in pressing the inflation hawks at other Fed branches to ease policy more aggressively.  Then for some reason as the economy went downhill in late 1930 and 1931, Harrison himself became strangely passive, despite his earlier reputation for activism.   Who does that remind you of?

So what does all this say about current events?  Krugman says we are going through a “dark ages” of macro, forgetting much of what we have learned.  He is mostly referring to those who deny that inadequate aggregate demand is the main problem that we face today.  Or that think Say’s Law holds in a recession.  He is not referring to those who advocate unconventional monetary stimulus, as Krugman himself does this on occasion.

In my view we are going through two dark ages, which is probably a horrible metaphor.  I see the problem as both Austrian and Keynesian economics, or (so that I don’t offend any Austrians or Keynesians reading this) at least the cruder versions of each school of thought.  For an analogy, recall the politics of the interwar period.  The fascists and socialists were battling each other, each full of “passionate intensity.”  In contrast, classical liberals had “lost all conviction.”  Since I have picked on Hayek in this post, let me emphasize that the Hayek of The Road to Serfdom is a hero in that political story, fighting the lonely battle for classical liberal ideas.

Commenters keep taunting me, pointing out that I criticize Hayek without having read his work.  But David’s paper makes me even less inclined to read it.  Not because I think it wouldn’t be persuasive, but because I fear it would be.  The Austrian story was already so persuasive that today “we are all Austrians now.”  Then add Hayek’s rhetorical skills.  If I could read Prices and Production in the same way that Odysseus listened to the Sirens, then I would be tempted.  But what is to stop me from becoming bewitched by his message?  Like crack cocaine, it is best not to tempt fate by sampling the most powerful types of Austrian economics.  I’ll stick to Garrison’s Powerpoint slides.

So are we fated to keep endlessly circling between the Austrian pessimism, the Keynesian fiscal follies and the new Keynesian inflation targeting?  I’m not that pessimistic.  As bad as things are, the Great Depression was much worse.  Surely we gain a little each time events teach us these painful lessons.  So even when I read this sort of depressing quotation from George Harriso . . . I mean Ben Bernanke, I still refuse to give up hope.  Someday we will say “we are all NGDP futures targeters now.”

Update.  Just after I posted this I noticed that Krugman said Bernanke was Montegu Norman, not George Harrison.  Well at least we picked from the same “Lords of Finance” book.

Tags: , ,


23 Responses to “We’re all Austrians now . . . make that Keynesians.”

  1. Gravatar of Contemplationist Contemplationist
    18. December 2009 at 23:04


    Outstanding post. That sent a chill down my spine.
    However, a quibble if you don’t mind. Hayek had significantly refined his views, and the pejorative term “hangover theory” is not too fair. He favored battling a “secondary deflation” and you obviously know this, as you mentioned it in the EconTalk podcast with Russ Roberts.

    Also, if you read Steve Horwitz of The Austrian Economists blog, you will see this tradition of Hayekian perspective on Monetary Disequilibrium defended forthrightly.
    Hell, you can ask Bill Woolsey, he frequents the Austrians and has found monetary disequilibrium well represented among the Austrians.

    So, I fear that you have excessively caricatured the Austrians.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2009 at 23:17

    As usual, you are extremely long winded. It will take me a little time to render my minor and (possibly from your viewpoint) insipid verdict. We here are currently stuck in a blizzard. I’m busy stuffing logs in our fire place. Talk to you later.

  3. Gravatar of Jim Glass Jim Glass
    18. December 2009 at 23:55

    It is clear that in 1932 Keynes moved from 1 to 3, and within a few years much of the profession followed him. The question is why…

    Milton Friedman similarly asked…

    “There remains the twin questions of why Keynes, who described himself in the preface to the German edition as having been ‘a priest of’ the English classical quantity theory tradition, regarded it as incompetent to explain the persistence of high unemployment in the 1920s and 1930s, and of how those of us who disagree with him reconcile that remarkable phenomenon with the earlier theory…”

    Part of the answer Friedman gives is that, given the state of the data of the day, Keynes simply may not have realized the money supply had contracted.

    Without money supply numbers, Keynes (like everyone else) seems to have assumed from low interest rates that the money supply was loose — yet he saw deflation occurring, which combined with a loose money supply leads to the conclusion that monetarism had stopped working for some unknown reason that had to be newly figured out. Which he then set out to do.

    “To Keynes and many of his contemporaries, this sequence of events seemed a clear contradiction of the earlier theory and of the efficacy of monetary policy. They tended then, as many still do, to regard monetary policy as operating via interest rates. Short-term interest rates in the United States had fallen drastically … Judged in these terms, monetary policy was ‘easy,’ yet it apparently had been powerless…

    “From another, and I would argue far more significant, point of view, monetary policy was anything but ‘easy.’ That point of view regards monetary policy as operating via the quantity of money. In terms of annual averages, the quantity of money in the United States fell by one-third from 1929 to 1933 [etc.]…

    “Data on the quantity of money were not published regularly at that time and were not readily available even with some lag, whereas interest rates were readily and contemporarily available — both effect and reinforcement of the tendency to interpret monetary policy in terms of the interest rate rather than the quantity of money.

    “Keynes may well not have known what was happening to the quantity of money, though if he had, he would also have known that ‘[a]t all times throughout the 1929-33 contraction, alternative policies were available to the [Federal Reserve] System by which it could have kept the stock of money from falling, and indeed could have increased it at almost any desired rate…'”


    Counterfactual: If Keynes had realized in 1933 that the money supply had fallen by 33%, would he have felt the need to write the General Theory, would Keynesianism exist, and what would Krugman be pushing today?

  4. Gravatar of david david
    19. December 2009 at 03:13

    Contra Sadowski, I do like the writing style here. Don’t change it! 😉

  5. Gravatar of Scott Sumner Scott Sumner
    19. December 2009 at 06:53

    Contemplationist, Thanks. I entirely agree with your comment, except that I was unfair. All I can say is that I tried to indicate that the model I was discussing wasn’t state of the art Austrian theory, or even Hayek at his best, but rather the sort of crude caricature of Austrian economics that becomes popular at times like this. I think the low interest rate/speculative excesses/inevitable hangover story that is so popular now is associated with Austrian economics, even though it is a crude caricature. BTW, you could say that about any theory. MV=PY is a crude caricature of monetarism. The idea that monetary policy is ineffective in a liquidity trap is a crude caricature of Keynesianism.

    BTW, When I said Hayek later thought the deflation had gone too far, I was referring to the “secondary deflation” issue that you raised.

    Jim Glass. I have heard that argument, but I don’t really buy it. First of all, in those days the monetary base was considered “money” not M2. And Keynes knew that the monetary base rose sharply during the early 1930s, the problem is that those monetary injections didn’t boost the broader aggregates.
    Among all living economists the one that most closely resembles Keynes is Krugman. And Krugman is aware of the money supply data, and yet in a NTR of Books article after Friedman died, Krugman says he agrees with Keynes’ interpretation, not Friedman’s. So I don’t think it would have made any difference. Keynes would have had the same response that Krugman had. He would have said that additional injections of base money would not have raised M2, they would have simply reduced the money multiplier, much as what happened in Japan.

    David, Thanks. I’m sure it’s tough to pick up all my pearls of wisdom when tending a fire. 🙂

  6. Gravatar of Kevin Donoghue Kevin Donoghue
    19. December 2009 at 10:54

    Unfortunately, the paper I refer to is not available on the internet.

    Try here. (Scroll down to paper number 626).

    It’s an interesting angle and one of your most interesting posts to date, but it’s also a bit like staging Macbeth without Duncan, Banquo, and Lady Macbeth. By which I mean, respectively, Marshall (the old king slain by Keynes), Hicks (whose heirs inherited the throne) and Joan Robinson.

    The introduction to Snowdon and Vane’s Macroeconomics Reader lists the following as the six most cited macroeconomists in 1936-39: Keynes, Robertson, Hicks, Pigou, Harrod and Hawtrey. (Hayek shares 7th place with Haberler; Joan Robinson is 9th.) The debate centred on Cambridge. Most of the participants were pupils of Marshall. Of that six, only Hicks had much interest in the Austrian school and that doesn’t mean much because Hicks was interested in any and every school. Unfortunately for Joan Robinson he was particularly interested in Walras, which is why the “Bastard Keynesians” he begat turned out as they did.

    Turning to the present day, I’m sure Krugman would be flattered to learn that he is the the leading liberal intellectual among economists, but I don’t think he could count on topping a poll of liberals if Joe Stiglitz and Amartya Sen were on the ballot.

  7. Gravatar of ssumner ssumner
    19. December 2009 at 11:39

    Kevin, Thanks for the remarks, which I agree with. You are right, Marshall influenced the entire Cambridge school. It’s sad how people overlooked Fisher’s stuff from the 1920s, as much was very good. He basically invented Phillips Curve analysis in the early 1920s. But people stopped caring about the price level in the late 1930s.

    Laidler has a book that discusses this history much more completely than I would be able to.

    I misspoke in my reference to Krugman. I meant to say that he was the leading liberal economist intellectual, not the leading leading liberal intellectual according to economists. If you surveyed just economists, Sen and maybe Stiglitz might be more popular. I can’t say. But Krugman’s NYT column gives him a high profile. He is far better known among non-economist intellectuals.

    BTW, I am afraid I don’t know a lot about the areas for which Stiglitz won his Nobel prize. But I can tell you that Krugman has far better skills at analyzing real world macroeconomic problems than Stiglitz, at least based on what I have seen. I recall a devastating attack on Stiglitz by Rogoff. No one would be able to do that to Krugman. He is too careful.

  8. Gravatar of Doc Merlin Doc Merlin
    19. December 2009 at 12:48

    Working on a response to this, it will take me a few weeks. Hopefully it will be epic.

  9. Gravatar of 123 123
    19. December 2009 at 12:48

    One of the best internet blog posts ever!
    I would add that Austrian pessimism has come back in the shape of the ideas of Fisher Black (Tyler Cowen), and Minsky (Paul Krugman).

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. December 2009 at 12:52

    I apologize for my somewhat bizarre comment earlier. Just to be clear when I alluded to the typical length of your posts it was strictly tongue in cheek. I wouldn’t change a thing. They read like well embellished stories and they always build up to interesting conclusions. Moreover I always learn a thing or two in the process.

    I didn’t have enough time last night to do this post justice but found the topic immediately provocative (hence my frustration was showing). I find your idea that the times can influence macroeconomic thinking very appealing. I personally have an admittedly superstitous belief in long cultural and economic waves, and think it’s clear that we’re seeing a replay of many of themes of the 1930s.

    Interestingly, Bruce Bartlett has a new book out called “The New American Economy” which is basically a history of the rise and fall of Keynesian economics followed by a history of the rise and fall of Supply Side Economics. So he models the rise and fall of economic theories but in the process he describes how in a sense we’ve come full circle to the point where Keynesian ideas, for better or worse, are once again in vogue.

    Now, back to the fire. 🙂

  11. Gravatar of Jim Glass Jim Glass
    19. December 2009 at 14:54

    Krugman’s NYT column gives him a high profile. He is far better known among non-economist intellectuals.

    As a gratuitous aside:

    Krugman has for some reason picked a public feud with the Rasmussen pollsters. In one of its shots back, Rasmussen says that among the minority of people who report being familiar with Krugman, his favorable/unfavorables split 50-50 — but when he is associated with the New York Times, his “very unfavorables” triple, while his “favorables” stay the same.

    (Which does raise a question about how familiar with him those who say they are familiar with him are.)

    To quote: “These results highlight the importance of question wording, especially for lesser known people such as Krugman.”

    (Heh, heh, “lesser known people such as …”.)

    By the same token, John Fund by himself has pretty negative ratings among the few who report being familiar with him. But when he is associated with the Wall Street Journal, his “favorables” take a big surge up.

    So if you read amid the gossip at Gawker or Mediabistro that Krugman has sent his resume to Murdoch, you’ll know what’s going on.

  12. Gravatar of TGGP TGGP
    19. December 2009 at 15:30

    The Real Bills Doctrine is missing from your account of the 20s/30s.

  13. Gravatar of david glasner david glasner
    19. December 2009 at 16:25

    Scott, Thanks so much for your very kind attention to my (and Ron Batchelder’s) paper. I don’t have too much to add to your summary of what I wrote. But here are two comments.

    First, don’t worry about Hayek being overly persuasive. Once you see where he went astray, you can appreciate all his great insights without getting taken in by his deflationism, which (as I never tire of pointing out) he himself repudiated in the fullness of time.

    Second, in an essay I published in one of the last issues of the late great English periodical Encounter around 1988 called “Where Keynes Went Wrong” (the title has unfortunately been appropriated by another Austrian nut of the Tom Woods ilk for his recently published book). In my essay I argued that Keynes in 1931 was facing withering criticism from Hayek and Hawtrey and others for his Treatise and realized that he needed to go back to the drawing boards. His argument in the Treatise was still that monetary policy could do the job of restoring full employment. But when Britain did not succeed in restoring full employment after going off the gold standard, I think that Keynes became disillusioned with the efficacy of monetary policy. (I don’t disagree with your remarks about the misunderstanding of open market operations in the US.) I then suggested that in fact England recovered strongly from the Depression after going off gold, and that the reason Keynes believed that monetary policy was a failure was that British unemployment was kept high by the high nominal levels of unemployment compensation that had been set in World War I when the price level was at least 50 percent higher than it was in the 1930s. So Keynes mistook structural unemployment for cyclical unemployment. That argument about British unemployment was advanced in the late 1970s or early 1980s by Levis Kochin and Dan Benjamin in a couple of papers in JPE.

    PS Here is the comment I posted on Krugman’s blog about Bernanke and Montague Norman

    I also enjoyed reading the Lords of Finance. Montague Norman, though he appears as a somewhat pathetic and ineffectual figure, was hardly in a position to have changed the course of events. The problem lay in New York (where Fed policy was made in those days) and Paris which stayed on the gold standard (the source of deflation) for far loo long. England, notwithstanding Norman’s opposition, left the gold standard in September 1931, and began to recover almost immediately. And although British unemployment remained high, it was much lower than in the US.

    So a comparison of Bernanke to Montague Norman is far too kind to Bernanke. Unlike Norman, Bernanke could actually make a difference now.

  14. Gravatar of ssumner ssumner
    19. December 2009 at 18:14

    Doc Merlin, OK, but now you have raised our expectations.

    123, I appreciate that 123, thanks. Krugman is a pessimistic personality, but I would say his view is less pessimistic that those who say there is nothing that can or should be done about the recession from the demand side. (And again, I am speaking of crude caricatures here.)

    Tyler Cowen does focus on the real side of the problem, but he also says he thinks the current recession is about one third demand-side.

    Mark, Don’t worry about the comment–I made a little joke at the end of my next post.

    Jim, That is very funny. Isn’t Rasmussen the computer poll? If so, perhaps it tilts a bit Republican because people were reluctant to say they opposed Obama to a real person. This may be wrong, I just sort of vaguely recall reading something about this on realclearpolitics during the last election.

    TGPP, You are right, and to be honest my “Austrian” catagory is a catch-all that includes anyone who was opposed to additional stimulus from the Fed. I was focused more on the zeitgeist idea, not the details of each school of thought (which I greatly oversimplified.) But sometimes I think simplifications can make certain ideas clearer.

    David, Yeah, I’m not really worried about reading Hayek. I get lots of complaints from commenters that I haven’t read Hayek, so I thought I would toss that in.

    I agree with your comments about Britain. I also read the Kochin and Benjamin piece, and I think it proved to be somewhat prophetic. When the Eurozone began to experience a high natural rate of unemployment in the 1980s and 1990s, their argument suddenly seemed much more plausible.

    Of course Krugman doesn’t accept that sort of argument, which is presumably why he thinks Norman was holding back recovery in the UK.

    I hope I was right about Harrison. When writing these posts I often have to rely on memory. I don’t have a copy of Lords of Finance at home, and just have to hope my memory isn’t faulty.

  15. Gravatar of Ryan Vann Ryan Vann
    19. December 2009 at 20:41

    Mr. Sumner,

    You said “That is very funny. Isn’t Rasmussen the computer poll? If so, perhaps it tilts a bit Republican because people were reluctant to say they opposed Obama to a real person.”

    That might have been the case the beginning of this year, but criticism of the Bammer, even by those that voted for him, are quite normal today. In general, Rasmussen conducts relatively accurate polls.

  16. Gravatar of Lord Lord
    19. December 2009 at 21:24

    I liked the talk of crude Austrian pessimism, cringing at the thought anyone anywhere might be having fun, the crude Keynesian optimism that there is no problem a little inflation won’t cure, but I too am optimistic we are learning and making progress, though too slowly for my taste.

  17. Gravatar of TGGP TGGP
    20. December 2009 at 13:23

    david glasner, is the Tom Woods-esque author you are referring to Hunter Lewis?

  18. Gravatar of david glasner david glasner
    20. December 2009 at 13:59

    TGGP, Yes I think that’s his name. His book has been advertised in some mainstream periodicals and he has a website and is for sale on Amazon. When I saw the title, I wanted to make sure that he was only copying my title, not plagiarizing my argument. I don’t think that I have any cause for complaint on that account.

  19. Gravatar of ssumner ssumner
    20. December 2009 at 15:58

    Ryan, Yes, I misspoke. I meant to say don’t the other polls tilt slightly Democrat. I was thinking that perhaps Krugman didn’t like it because it gave results that were more Republican than the other polls.

    Thanks Lord.

  20. Gravatar of Ryan Vann Ryan Vann
    22. December 2009 at 14:32

    True enough. I suppose conclusion is the mother of all selection in that case.

  21. Gravatar of Immer die passende Wirtschaftstheorie « Aus dem Hollerbusch Immer die passende Wirtschaftstheorie « Aus dem Hollerbusch
    15. July 2010 at 05:38

    […] Österreichern, Keynes usw. in der Zwischenkriegszeit an Hand zweier Ökonomen nachzeichnen. Sumner: It’s [welche Theorie sich durchsetzt] all about the zeitgeist.  Maybe I overuse this concept, […]

  22. Gravatar of In Praise of Gustav Cassel « Uneasy Money In Praise of Gustav Cassel « Uneasy Money
    28. November 2011 at 19:12

    […] a UCLA working paper, and I will post the revised version on the SSRN website. Scott Sumner wrote a blog post about the paper almost two years […]

  23. Gravatar of A New Version of My Paper (With Ron Batchelder) on Hawtrey and Cassel Is Available on SSRN « Uneasy Money A New Version of My Paper (With Ron Batchelder) on Hawtrey and Cassel Is Available on SSRN « Uneasy Money
    29. March 2012 at 19:49

    […] at a number of academic workshops.  Almost everyone who has commented on it has really liked it.  Scott Sumner plugged it on his blog two years ago.  Scott’s own very important work on the Great Depression has been a great inspiration for […]

Leave a Reply