Did Keynesianism lengthen the great depression, or shorten it? And how relevant is the Austrian school?

Economics Economics Questions
1

I saw the following comments and counter arguments on another site, and as I am just beginning to learn more about the Austrian school of economics and Mises, I would like it if some people more experienced in the theory and practical applications of the theory could come up with intelligent rebuttals to the counter-arguments below.

Original comment:

" Matt Stiles: Keynesian nonsense. Not doing enough in 1930 wasn’t what caused the Depression. An enormous amount of speculation encouraged by central banks caused a boom and inevitable bust of which a recession was required to clean out the excesses.

What turned it into a depression, was Keynesian ideology that governments should act to support asset prices by juicing the money supply, removing us from the gold standard, building bridges to nowhere, etc.

Asset prices want to fall. Let them. Their process of price discovery can either take 2 years or 20. But they will get to a level that represents the true amount of capital in our economy one way or another. Not some fantasy amount of capital leveraged to the hilt and backed by nothing. But real capital. Wealth. Savings.

Harper learned nothing of the Depression, because his knowledge of it is historical revisionism with a Marxist slant. If he had learned anything, he would be advocating a ‘hands off’ approach to the economy."

Counter argument 1:

“Or the experience of Japan in the 1990s, where public spending was the only thing that kept the economy afloat. Give me a break on the von Mises garbage. That path leads to severe wealth concentration for the sake of a philosophical ideal of libertarianism. Ask the Mises folks to explain to you their notion of meritocracy - it’ll make your blood cold, if you are warm blooded to begin with.”

Counter argument 2:

"Matt Stiles from Muenster, Germany… You know nothing about the great sepression or for that matter John Keynes. The information you are quoting from is so completely out of touch with the reality of what occurred in the 30’s as to be laughable.

You really should do some more research on what Keynes said and what actually took place in the 30’s. It wasn’t Keynes that sent the world into a depression, it was his theories that could have brought us ot of/or prevented the depression in the first place. Unfortunately the economists of the time didn’t buy it and continued on with thier heads in the sand. Much like Harper has been doing."

Counter argument 3:

“I agree Norm, Matt Stile and other Keynes bashers are the real revisionists as they have their timeline on historical events completely wrong but try to attach them somehow. Matt may i suggest you go and read Keynes theory, but also look at when it was published. THEN, look at how history played out in the 30’s and you will see how Keynes Theories were right while the the supply siders of the last 25 years have managed to screw things up completely.”

Counter argument 4:

"Matt, do you invent and remix history as you go along? The only Keynesian thing about the Great Depression was Roosevelts’ New Deal and the effort to wean US liquidity supply off a fixation with gold.

The New Deal worked well while it lasted, pulling the country out of the mire until 1936, when Roosevelt listened to advisers like you. The stimulus stopped and the country sank right back into the Depression. kerplunk!

The scary thing is that there are still people about who think like you and Harper and Flaherty are amongst them.

The only thing we can be ABSOLUTELY sure of is your/their way does NOT work and creates long periods of economic stagnation and much suffering.

No one can say what the huge bailouts in the US, their nationalization of a large part of their banks and lending institutions and the massive liquidity injections will produce in their next generation. However, we are not them.

W did not start this with the biggest deficit budgets in history and a toxic mortgage plague. Canadian real estate values, outside of a few speculative areas, is holding very well. Our banks are solid. Our huge resource base guarantees a good life for Canadians. If we can move fast and control the Canadian Artic, we will do even better. (We are not moving there at all at the moment and others are.)

We need the government to take up the spending slack with stimulus budgets for a 12-24 months to advert an indefinite period of pain. Harper was not willing to do it before but he will now.

Thank God he values his Sussex address more than his promises and principles!"

Counter argument 5:

“From the (Austrian school) economics of rejecting numbers and elevating gut feeling to near god-like stature, we’re supposed to learn truth? No thanks. If you can’t quantify it, it ain’t worth sh!t.”

Counter argument 6:

"“mises.org is where you will find the truth.”

That is what Ayn Rand’s golden boy Alan Greenspan said until he realized the the crud that you just said was utter childless nonsense. You are pushing an agenda for the clueless. Marxist slant. You guys can’t shed the pre-teen rhetoric."

Counter argument 7:

“The comment from Matt Stiles is typical of the sort of nonsense that emerges these days. The depression of the 1930s began in 1929, worsened through 1933, revived briefly then plunged again. Keynes wrote the General Theory in 1936. Whatever wrong-headed policy prescriptions were making matters worse could not be called ‘Keynesian’.”

Counter argument 8:

“Message to Matt Stiles and others, Keynesian economic policy was rejected by the US and its members of the English speaking world during the 1930 as too simple. It did take hold in Germany during that period but not till the 1950 did it take hold of the English speaking world. Milton Freidman economic policy took over in mid 1970 and is still the dominate factor in the US economic policies today. Kiss you butt good by.”

Counter argument 9:

"K G from Alberta, Canada writes: The comment from Matt Stiles is typical of the sort of nonsense that emerges these days. The depression of the 1930s began in 1929, worsened through 1933, revived briefly then plunged again. Keynes wrote the General Theory in 1936. Whatever wrong-headed policy prescriptions were making matters worse could not be called ‘Keynesian’.

That said, it’s hopeful to see the Prime Minister emerging from his fantasy that the counter-productive (in many senses of that term) moves he took to cut the GST are in any way responsible for improving matters. Welcome, Mr. Prime Minister, to reality.

Matt Stiles is an Ayn Rand propagandist, an Objectivist. The manifesto of the Objectivists is a long-winded, unreadable novel, Atlas Shrugged, filled with cardboard characters and childish rants. No other political or economic school uses a fictional tome as a manifesto, except the Aryan Nation with The Turner Diaries. Von Mises is taught less and les these days in academia, and it is not a result of some silly conspiracy to hide any truth. The philosophy that von Mises advocated was trumped by Keynes. Even Alan Greenspan, the hard core follower of von Mises, gave his ten thousand yard stare speech on how he was deluded by that school. Even Harper, who is looking more and more like Prime Minister Bennett, is doubting his own von Mises based instincts."

Counter argument 10:

“Asset prices do not WANT to do anything. There is no Father Economy tin the model of Mother Nature which seems to be the fantasy of economic Darwinists. There is a tone in this belief that disturbingly echoes the beliefs of social Darwinists of the '30s and '40s. The economy serves humans and not the other way around.”

Of course some of these comments are inflammatory, and I am not siding with them nor am I necessarily siding with the original poster, either. My goal here is simply to further my own education and understanding of both sides of the issue.

The original page is here: http://www.theglobeandmail.com/servlet/story/RTGAM.20081216.wflaherty16/CommentStory/politics/home

2

Ultima,

I’m no expert in this matter. But if you want to learn about the Austrian interpretation of the causes of the Depression, this website has many books posted to read for free online.

Here’s a link to one of them: http://mises.org/rothbard/agd.pdf

3

Agreed, AGD is a must.

4

I laugh at how one of posters says that the only Keynesian thing about the Great Depression is the New Deal, as if that was this tiny part of it that didn’t have much of an impact on things.

Simply put, the Fed pumped tons of money into the system(the money supply doubled between 1920 and 1929) which resulted in wild speculation, eventually this all caught up to them and the boom was followed by a bust(as always), the government freaked out and started trying to fix it. This of course only made things worse, and we only were pulled out of it when the government began diverting capital to an actual industry(arms).

Every single one of those counter arguments are devoid of any arguments at all. They all simply personally attack Austrian’s and provide absolutely not contradicting points.

5

So I’m reading Rothbard’s “America’s Great Depression” for the first time. I can see how it may be slightly difficult to understand fully for someone wholly unfamiliar with Austrian economics, but nonetheless it is quite accessible.

So far, here’s something from the book which, though brief and here without explanation, directly addresses your question:

"GOVERNMENT DEPRESSION POLICY: LAISSEZ-FAIRE

If government wishes to see a depression ended as quickly as possible,
and the economy returned to normal prosperity, what course
should it adopt? The first and clearest injunction is: don’t interfere with
the market’s adjustment process. The more the government intervenes
to delay the market’s adjustment, the longer and more grueling the
depression will be, and the more difficult will be the road to complete
recovery. Government hampering aggravates and perpetuates
the depression. Yet, government depression policy has always
(and would have even more today) aggravated the very evils it has
loudly tried to cure. If, in fact, we list logically the various ways
that government could hamper market adjustment, we will find
that we have precisely listed the favorite “anti-depression” arsenal
of government policy. Thus, here are the ways the adjustment
process can be hobbled:
(1) Prevent or delay liquidation. Lend money to shaky businesses,
call on banks to lend further, etc.
(2) Inflate further. Further inflation blocks the necessary fall in
prices, thus delaying adjustment and prolonging depression. Further
credit expansion creates more malinvestments, which, in their
turn, will have to be liquidated in some later depression. A government
“easy money” policy prevents the market’s return to the
necessary higher interest rates.
(3) Keep wage rates up. Artificial maintenance of wage rates in a
depression insures permanent mass unemployment. Furthermore,
in a deflation, when prices are falling, keeping the same rate of
money wages means that real wage rates have been pushed higher.
In the face of falling business demand, this greatly aggravates the
unemployment problem.
(4) Keep prices up. Keeping prices above their free-market levels
will create unsalable surpluses, and prevent a return to prosperity.
(5) Stimulate consumption and discourage saving. We have seen
that more saving and less consumption would speed recovery;
more consumption and less saving aggravate the shortage of savedcapital
even further. Government can encourage consumption by
“food stamp plans” and relief payments. It can discourage savings
and investment by higher taxes, particularly on the wealthy and
on corporations and estates. As a matter of fact, any increase of
taxes and government spending will discourage saving and investment
and stimulate consumption, since government spending is
all consumption. Some of the private funds would have been saved
and invested; all of the government funds are consumed.15 Any
increase in the relative size of government in the economy, therefore,
shifts the societal consumption–investment ratio in favor of
consumption, and prolongs the depression.
(6) Subsidize unemployment. Any subsidization of unemployment
(via unemployment “insurance,” relief, etc.) will prolong unemployment
indefinitely, and delay the shift of workers to the fields
where jobs are available.

These, then, are the measures which will delay the recovery
process and aggravate the depression. Yet, they are the time-honored
favorites of government policy, and, as we shall see, they were
the policies adopted in the 1929–1933 depression, by a government
known to many historians as a “laissez-faire” administration." (pp. 20-21)

Now, whether these policies of 1929-1933 were specifically attributable to Keynes is perhaps questionable. I don’t know the answer, but from the responses you include in your post, it looks doubtful. But the larger point, it seems, is that by today’s standards such recommendations would definitely be labeled - by Austrians at least - as Keynesian.

6

Keep in mind that very few things Keynesian are directly attributable to Keynes. More so to his disciples.

7

This is very true. I wish more Austrians understood this. Keynes thought FDR should have lowered taxes BTW.

8

HAHAHHAAHAH.

STOP READING GLOBE AND MAIL COMMENTS.

It will make you lose all faith in humanity ( or Canadians).

9

As Renshaw illustrates in Was there a Keynesian Economy in the USA between 1933 and 1945?, the New Deal cannot accurately be described as “Keynesian.”

Stein’s summary was remarkably accurate. As he noted, “It is possible to describe the evolution of fiscal policy in America up to 1940 without reference to [Keynes]…by the outbreak of the war a large part of the fiscal revolution had already occurred. It was accepted policy that we would run deficits in depressions, that we would not raise taxes in depressions in an attempt to balance the budget.”

10

Recognise Keynes for what he was, an apologist for government intervention, he did not ‘invent’ government intervention.

11

Yup, Keynes was just the guy that put Foster/Catchings in a pretty (read: obfuscatory and confusing enough that people couldn’t easily debunk it) package, and who probably had the right connections in high places.