So I just read Daniel Kuehn’s “A Critique of the Austrian School Interpretation of the 1920-1921 Depression,” and I must say that there’s nothing original in that paper and that it doesn’t even attempt to invalidate the arguments put forth by the Austrian school. Rather than focusing on fundamental issues he merely resorts to quibbling over minor details[1] and refers to Keynes’ pre-Keynesian work as an economist (work that was, in large part, endorsed by the likes of Hayek and Rothbard). This is pure equivocation as Kuehn conflates the theories of early Keynes, the pre General Theory and End of Lassiaz-faire Keynes, with what is now known as Keynesian economics, based almost exclusively on his work in the General Theory.
Keynes was initially trained by Marshal, who, along with Fisher, rediscovered the quantity theory and refuted all endogenous explanations of inflation[2]. His Tract on Monetary Reform merely criticized (a) the inter-war pseudo gold standard and (b) Churchill’s attempt to return to pre-war parities (things that Hayek and Mises vigorously attacked as well). The disagreement between early Keynes and the Austrians revolved almost exclusively around Keynes’ proposals and remedies, namely the call for monetary nationalism, fluctuating exchange rates, and internal price stability (something that the Fisherites endorsed, but which the Austrians vehemently opposed).
But the key point is that Keynes’ views, especially when it came to monetary theory, radically changed throughout the 20s and 30s. He began as a liberal neoclassical economist with purely orthodox views (along the lines of the Monetarist’s) who later employed a pseudo-Wicksellian framework[3], and ultimately finished his career as a neo-Mercantilist and interventionist economist who believed that (a) interest was solely a monetary phenomenon, (b) inflation was a function employment rates, (c) aggregates and economic variables had to be forcefully manipulated through government intervention in order to assure “full employment,” and (d) denied the consumption/investment trade-off (the acceleration principle).
Additionally, the fact that Strong began to reduce the discount rate back to pre-recession levels in an attempt to prevent deflation and keep the general price level stable is, according to Kuehn, “Keynesian.” Now it is true that Keynes opposed deflation on all grounds throughout his career, but it’s ridiculous to claim that lowering interest rates, in order to fight general price deflation, is somehow uniquely Keynesian. First of all, Keynes, in the General Theory, seeks to abolish interest altogether (the socialization of investment)[4], and the main plank of early Monetarism was price-stabilization. Of course, all of this ignores the arguments made by the Austrian school which assert that Fisher and Strong’s attempts to prevent fluctuations in the general price level by altering the supply of money (in the broader sense) led to relative price distortions, a misallocation of resources towards ultimately untenable productions, and ultimately the Great Depression.
Thus, according to Kuehn, Strong’s price-stabilization policies, which sought to reduce credit expansion and alleviate the high rates of inflation brought about by the war, cannot be considered “anti-Keynesian” because Keynes, at that time, supported it. And Strong was actually a Keynesian because he began to reduce the discount rate when the general price level began to fall. Hopefully the absurdity of such assertions is now obvious. The fact that Kuehn does not distinguish between early Keynes and what is now known as Keynesian economics is odd, to say the least.
Next, Kuehn claims that Keynes supported explicit inflationary policies only in the face of nominal wage rigidity which, according to Kuehn, did not exist during this period because individuals, for whatever reason, were not expecting continuous wage reductions. Forced inflationary policies and government work programs were required during the great depression because individuals, again for whatever reason, expected continuous wage reductions[5]. Of course this theory explicitly ignores all of the various policy mistakes made by the Roosevelt and Hoover administrations that led to extreme price rigidity in the labor market. Such policies include, for example, the fact that Hoover encouraged business leaders to maintain high wages (supported by effective demand doctrines which claimed that nominal wage reductions are essentially self-defeating), Hoover and FDR’s “pro labor stance,” and all of the other various New Deal policies.
Additionally, Keynes explicitly claimed that the labor market and laborers are inherently irrational, and that they are blinded by the “money illusion.” The labor market, according to Keynes, is entirely unique. Kuehn addresses this but then dismisses it on the grounds that Keynes’ theories in the General Theory are not universal, but only apply to major depressions. For whatever reason, each recession is fundamentally different and governed by different economic laws.
Either way, Kuehn’s paper does not address the fundamental arguments made by the Austrian school regarding the 1920-21 depression as an empirical refutation of Keynesian counter-cyclical policy (again, defined almost exclusively by his work in the General Theory, which radically different from his earlier stuff). Simply put, the government elevated interest rates in order to reduce credit expansion and purge the economy of malinvestment, which led to a sharp but extremely short and orderly recession, which was then turned into an unsustainable recovery due to the introduction of open market operations and Strong’s “price stabilization mandate.” Expansionary fiscal policy was not employed; in fact the opposite is true. Thus, the only way that Strong and Harding’s policies could be considered “Keynesian” is if we redefine what “Keynesian economics” (not referring to the new Keynesian synthesis) is. This is apparently what Kuehn tries to do.
[1] For example, he points out the fact that Wilson cut spending/borrowing and balanced the budget (and not Harding), and that Harding did not reject Hoover’s proposals on philosophical grounds, but rather failed to employ them because, at the time, the recession was already over.
[2] The Cambridge equation, M=KPY, is, for all intents and purposes, absolutely identical to the equation of exchange, MV=PY.
[3] Hayek showed that Keynes fundamentally misunderstood the Wicksellian framework which employed Bohm-Bawerk’s, i.e., the Austrian, capital theory/framework.
[4] The rate of interest, according to Keynes, “rewards no genuine sacrifice,” and the “rentiers” should be “euthanized.”
[5] I wish to ignore the MEC since it would require a rather lengthy refutation which is not really important and can be easily found on the internet.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Excellent post...
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Political Atheists Blog
Bravo...
My Blog: http://www.anarchico.net/
Production is 'anarchistic' - Ludwig von Mises
What would you folks say about this writing on the 1920-21 depression? (Ignore the harsh partisan rhetoric)
The US recession of 1920–1921 is endlessly cited by Austrians as proof that Keynesian economic policies are not needed to stimulate an economy out of recession or depression. Unfortunately, Austrians are deeply ignorant about the recession of 1920–1921. This recession was atypical, occurred shortly after the WWI, and recent research shows that the GDP contraction was not especially severe. We can list some basic facts about the 1921 recession below and how these facts do not support the Austrian/libertarian myths one endlessly hears on their blogs:(1) Duration of the RecessionThe recession lasted from January 1920 to July 1921 (a period of 18 months). From January 1920 until July 1920 the recession was mild, and only became severe after July 1920 (Vernon 1991: 573), and the downturn persisted until July 1921. Libertarians claim that the recession of 1920–1921 was short. Of course, what they don’t say is that a recession lasting 18 months is in fact a very long one by the standards of the post-1945 US business cycle. The average duration of US recessions in the post-1945 era of classic Keynesian demand management (1945–1980) and the neoliberal era (1980–2010) has been about 11 months (see Carbaugh 2010: 248 and the data in Knoop 2010: 13; curiously, there has only been one post-1945 US recession that lasted 18 months: the Great Recession of December 2007–June 2009, which was much worse than the 1920–1921 downturn). The average duration of recessions in peacetime from 1854 to 1919 was 22 months (Knoop 2010: 13), and the average duration of recessions from 1919 to 1945 was 18 months (Knoop 2010: 13).In the post 1945 period this was cut to about 11 months. Thus the average duration of recessions was essentially cut in half after 1945, because of countercyclical fiscal and monetary policy. Even expansions in the post-1945 business cycle became longer: the average duration of post-1945 expansions was 50 months. By contrast, the average duration of expansions from 1854 to 1919 was 27 months, and the average from 1919 to 1945 was 35 months (Knoop 2010: 13). In other words, the average length of post-1945 expansions became 43% higher compared with that of 1919 to 1945, and 85% higher than between 1854 to 1919.Macroeconomic performance after 1945 has been superior, without any doubt, to that of the previous gold standard eras. The recession of 1920–1921 with a duration of 18 months was in fact of long duration relative to the average of post-1945 recessions. Keynesian and even neoliberal economic management of the business cycle has been superior to the system that existed before 1933. The empirical data tells us that, if Keynesian stimulus had been applied early in 1920, there are convincing reasons for thinking that the contraction would have been far shorter than 18 months. (2) Severity of the RecessionLibertarians seem unaware that recent economic research has shown that the downturn of 1920–1921 was not as severe as previously thought. The widely accepted definition of a depression is a fall of 10% in output or GDP. In past estimates of the fall in national output, official Commerce Department data suggested that GNP fell 8% between 1919 and 1920 and 7% percent between 1920 and 1921 (Romer 1988: 108). But Christina Romer has argued that actual decline in real GNP was only about 1% between 1919 and 1920 and 2% between 1920 and 1921 (Romer 1988: 109; Parker 2002: 2). So in fact real output moved very little, and this was not a depression on the scale of 1929–1933 or previous 19th century depressions. Libertarians cannot claim that 1920–1921 was an example of the free market quickly ending a downturn where output collapsed by 10% or more (a real depression). In reality, GNP contraction was relatively small, and the growth path of output was hardly impeded by the recession (Romer 1988: 108–112; Parker 2002: 2).(3) Deflation and Positive Supply ShocksAlthough deflation was very severe, one significant cause of the deflation was a positive supply shock in commodities due to the resumption of shipping after the war (Romer 1988: 110). After WWI, there was a recovery in agricultural production in Europe, even though American farmers had continued their production at wartime levels. When primary commodity supplies from other countries were resumed after international shipping recovered, there was a great increase in the supply of commodities and their prices plummeted. As Romer argues, “Tiffs suggests that a flood of primary, commodities may have entered the market following the war and thus driven down the price of these goods. That these supply shocks may have been important in stimulating the economy can be seen in the fact that the response of the manufacturing sector to the decline in aggregate demand in 1921 was very uneven …. The industries that were most devastated by the downturn were those in heavy manufacturing …. On the other hand, nearly all industries… that used agricultural goods or imports as raw materials experienced little or no decline in labour input in 1921 .... That industries related to agricultural goods and imports flourished during 1921 suggests that beneficial supply shocks did stimulate production in a substantial sector of the economy” (Romer 1988: 111). Vernon (1991) comes to the same conclusion as Romer: the deflation in 1920-1921 was caused not just by a decline in aggregate demand but also by a positive aggregate supply shock. Another factor is that deflationary expectations were high after the war, as prices over the 1914–1920 period had increased by 115% (Vernon 1991: 577). This means that business was expecting deflation. We can contrast this with the 1929–1933 period when severe deflation was largely unexpected, and had much more harmful consequences. (4) No Major Financial Crisis.The recession of 1920–1921 also had no serious financial crisis: although some bank failures occurred, there were no mass bank runs and collapses in 1920–1921 (Brunner 1981: 44). Stock market prices had been high before 1920 and overvalued and hit a peak 2 months before the onset of the recession. But this stock market bubble does not appear to have been caused by excessive private debt and leveraged speculation as in 1929. We can also note that the explosive rise in consumer credit to households and small businesses only occurred in the course of the 1920s (Parker 2002: 2), and thus large levels of private debt were clearly not a significant factor in 1920/1921. Thus debt deflationary effects were not as serious as in other recessions, and certainly not like the downturn of 1929–1933. (5) The Federal Reserve’s RoleIt is perfectly clear that the Federal Reserve had a role both in contributing to the cause of the recession and in ending it. As Vernon (1991: 573) notes, “Monetary policy began to shift in December 1919, then changed markedly in January 1920. The Federal Reserve Bank of New York’s discount rate, which had been pegged at 4 percent since April 1919, was raised to 4.75 percent in December 1919, to 6 percent in January 1920, and to 7 percent in June 1920. Similar discount rate increases were made at the other Federal Reserve Banks. Friedman and Schwartz argue that these sharp increases came too late to be responsible for the January 1920 turning point but that they produced the severe contraction and deflation which came after mid-year.” But, by 1921, there was monetary loosening. In April and May 1921, Federal Reserve member banks dropped their rates to 6.5% or 6%. In November 1921, there were further falls in discount rates: rates fell to 4.5% in the Boston, Philadelphia, New York, and to 5% or 5.5% in other reserve banks (D’Arista 1994: 62). The role of the Federal Reserve underscores how the recession of 1920–1921 was not like US downturns in the 19th century, since the US had no central bank before 1914 (and after 1836 when the charter of the Second Bank of the United States expired). If we admit that Fed policy contributed to the recession, then Fed easing of interest rates in 1921 also had a role in ending the recession. The relatively lower interest rates after May 1921 preceded the expansion that ended the recession (which began in July 1921). The recovery then has to be partly related to central bank policy, not to the pure free market eulogised by Austrian economists. And in fact one of the reasons why there was no sharp recession after WWII was that the Federal Reserve keep interest rates very low after 1945 (Vernon 1991: 580).In light of all this, the recession of 1920–1921 was very different from the contraction of 1929–1933 and various other pre-1914 recessions that were preceded by excessive private debt, and caused by bursting asset bubbles, severe financial crises, demand contractions and debt deflation.An obvious example of such a 19th century depression was that of 1893-1895. This was set off by a financial crisis in 1893 and caused the US to suffer high involuntary unemployment throughout the 1890s, even after a technical recovery had begun in 1895 (on this depression, see Steeples and Whitten 1998; Akerlof and Shiller 2009: 59-64; Romer 1986: 31).The belief that the recovery in 1921 proves that a laissez faire or “do nothing” policy will work in other cases of serious recession or depression is utter nonsense. Above all, the empirical data show that modern macroeconomic policies have reduced the durations of recessions after 1945. There is no reason why in principle the 1920–1921 recession could have been alleviated and brought to an end sooner if countercyclical fiscal policy had been used.UPDATEI have recently seen an article by Daniel Kuehn called “A critique of Powell, Woods, and Murphy on the 1920–1921 depression.”This also presents a critique of the Austrian view of the 1920-21 recession: http://factsandotherstubbornthings.blogspot.com/2010/10/1920-21-depression-article-is-on-online.htmlKuehn also draws attention to the role of the Federal Reserve, and argues that its high discount rate (the primary policy tool in those days) in 1920 to combat inflation was a major factor in inducing the recession. APPENDIX 1: GNP ESTIMATESAll GNP figures are merely estimates, since proper data collection was not done before about 1945. There are four important studies on GNP before 1945:Balke, N. S., and R. J. Gordon, 1986. “The American Business Cycle: Continuity and Change,” in R. J. Gordon (ed.), The American Business Cycle, University of Chicago Press, Chicago.Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.Romer, C. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908,” Journal of Political Economy 97.1: 1–37.Ritschl, A., Sarferaz, S. and M. Uebele, “The U.S. Business Cycle, 1867–2006: Dynamic Factor Analysis vs. Reconstructed National Accounts,” January, 2010https://www.ciret.org/conferences/newyork_2010/papers/upload/p_200-500401.pdfThe various estimates for 1920–1921 GNP:The U.S. Department of Commerce = 6.9% GNP declineBalke and Gordon = 3.5% GNP declineRomer = 2.4% GNP decline Balke and Gordon’s figures support a much lower decline for GDP. The estimate of Ritschl, Sarferaz, Uebele (2010) is higher than that of Balke and Gordon and Romer.APPENDIX 2: THE DEPRESSION OF THE 1890sFor data on the persistence of double digit unemployment in the 1890s, see the revised figures in Romer 1986: 31.Year Unemployment rate1892 3.72% 1893 8.09% 1894 12.33% 1895 11.11% 1896 11.965 1897 12.43% 1898 11.62% 1899 8.66% 1900 5.00%The US economy did not return to full employment for nearly a decade after 1893. Contrary to Austrian economic analysis, there is no evidence that the 1890s slump was rapidly ended by a laissez faire economy. In fact, since the US had no central bank in the 1890s, Austrians and other free market libertarians should be doubly embarrassed by the downturn in the 1890s and the persistence of high unemployment and sub-optimum growth.The other widely used estimate of unemployment in the 1890s is the work of Stanley Lebergott. His estimates of unemployment are much higher than Romer’s, so, even if his estimates are invoked as more accurate than Romer’s, they would only make matters worse for the libertarian position.And one might argue that Romer’s estimates are questionable (Lebergott 1992), and at least for the period from 1900-1929 (Weir 1986), as the idea that movements in the labour force were procyclical before 1945 can be challenged: if aggregate participation rates were anticyclical, then Lebergott’s estimates for 1900-1929 may be better (Weir 1986: 364; Weir 1992, however, does agree that Lebergott’s figures for 1890-1899 are too volatile). Here are Lebergott’s estimates of the unemployment rate:Year Unemployment rate 1890 4.0 1891 5.4 1892 3.0 1893 11.7 1894 18.4 1895 13.7 1896 14.5 1897 14.5 1898 12.4 1899 6.5 1900 5.0 BIBLIOGRAPHYAkerlof, G. A. and R. J. Shiller. 2009. Animal Spirits: How Human Psychology drives the Economy, and Why it Matters for Global Capitalism, Princeton University Press, Princeton.Brunner, K. 1981. The Great Depression Revisited, Nijhoff, Boston and London.Carbaugh, R. J. 2010. Contemporary Economics: An Application Approach, M.E. Sharpe, Armonk, New York.D’Arista, J. W. 1994. The Evolution of U.S. Finance, Volume 1: Federal Reserve Monetary Policy: 1915–1935, M. E. Sharpe, Armonk, New York.Knoop, T. A. 2010. Recessions and Depressions: Understanding Business Cycles (2nd edn), Praeger, Santa Barbara, Calif.Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800, McGraw-Hill, New York.Lebergott, S. 1992. “Historical Unemployment Series: A Comment,” Research in Economic History 14: 377–386.Parker, R. E. 2002. Reflections on the Great Depression, Edward Elgar, Cheltenham, Northampton, MA.Romer, C. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94.1: 1–37.Romer, C. 1988. “World War I and the Postwar Depression: A Reinterpretation based on alternative estimates of GNP,” Journal of Monetary Economics 22.1: 91–115.Romer, C. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908,” Journal of Political Economy 97.1: 1–37.Steeples, D. W. and D. O. Whitten, 1998. Democracy in Desperation: The Depression of 1893, Greenwood Press, Westport, Conn.Vernon, J. R. 1991. “The 1920–21 Deflation: The Role of Aggregate Supply,” Economic Inquiry 29: 572–580.Weir, D. R. 1986. “The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability,” The Journal of Economic History 46.2: 353–365.Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
“Tiffs suggests that a flood of primary, commodities may have entered the market following the war and thus driven down the price of these goods. That these supply shocks may have been important in stimulating the economy can be seen in the fact that the response of the manufacturing sector to the decline in aggregate demand in 1921 was very uneven …. The industries that were most devastated by the downturn were those in heavy manufacturing …. On the other hand, nearly all industries… that used agricultural goods or imports as raw materials experienced little or no decline in labour input in 1921 .... That industries related to agricultural goods and imports flourished during 1921 suggests that beneficial supply shocks did stimulate production in a substantial sector of the economy” (Romer 1988: 111).
Vernon (1991) comes to the same conclusion as Romer: the deflation in 1920-1921 was caused not just by a decline in aggregate demand but also by a positive aggregate supply shock. Another factor is that deflationary expectations were high after the war, as prices over the 1914–1920 period had increased by 115% (Vernon 1991: 577). This means that business was expecting deflation. We can contrast this with the 1929–1933 period when severe deflation was largely unexpected, and had much more harmful consequences. (4) No Major Financial Crisis.The recession of 1920–1921 also had no serious financial crisis: although some bank failures occurred, there were no mass bank runs and collapses in 1920–1921 (Brunner 1981: 44). Stock market prices had been high before 1920 and overvalued and hit a peak 2 months before the onset of the recession. But this stock market bubble does not appear to have been caused by excessive private debt and leveraged speculation as in 1929. We can also note that the explosive rise in consumer credit to households and small businesses only occurred in the course of the 1920s (Parker 2002: 2), and thus large levels of private debt were clearly not a significant factor in 1920/1921. Thus debt deflationary effects were not as serious as in other recessions, and certainly not like the downturn of 1929–1933. (5) The Federal Reserve’s RoleIt is perfectly clear that the Federal Reserve had a role both in contributing to the cause of the recession and in ending it. As Vernon (1991: 573) notes,
“Monetary policy began to shift in December 1919, then changed markedly in January 1920. The Federal Reserve Bank of New York’s discount rate, which had been pegged at 4 percent since April 1919, was raised to 4.75 percent in December 1919, to 6 percent in January 1920, and to 7 percent in June 1920. Similar discount rate increases were made at the other Federal Reserve Banks. Friedman and Schwartz argue that these sharp increases came too late to be responsible for the January 1920 turning point but that they produced the severe contraction and deflation which came after mid-year.”
But, by 1921, there was monetary loosening. In April and May 1921, Federal Reserve member banks dropped their rates to 6.5% or 6%. In November 1921, there were further falls in discount rates: rates fell to 4.5% in the Boston, Philadelphia, New York, and to 5% or 5.5% in other reserve banks (D’Arista 1994: 62). The role of the Federal Reserve underscores how the recession of 1920–1921 was not like US downturns in the 19th century, since the US had no central bank before 1914 (and after 1836 when the charter of the Second Bank of the United States expired). If we admit that Fed policy contributed to the recession, then Fed easing of interest rates in 1921 also had a role in ending the recession. The relatively lower interest rates after May 1921 preceded the expansion that ended the recession (which began in July 1921). The recovery then has to be partly related to central bank policy, not to the pure free market eulogised by Austrian economists. And in fact one of the reasons why there was no sharp recession after WWII was that the Federal Reserve keep interest rates very low after 1945 (Vernon 1991: 580).In light of all this, the recession of 1920–1921 was very different from the contraction of 1929–1933 and various other pre-1914 recessions that were preceded by excessive private debt, and caused by bursting asset bubbles, severe financial crises, demand contractions and debt deflation.An obvious example of such a 19th century depression was that of 1893-1895. This was set off by a financial crisis in 1893 and caused the US to suffer high involuntary unemployment throughout the 1890s, even after a technical recovery had begun in 1895 (on this depression, see Steeples and Whitten 1998; Akerlof and Shiller 2009: 59-64; Romer 1986: 31).The belief that the recovery in 1921 proves that a laissez faire or “do nothing” policy will work in other cases of serious recession or depression is utter nonsense. Above all, the empirical data show that modern macroeconomic policies have reduced the durations of recessions after 1945. There is no reason why in principle the 1920–1921 recession could have been alleviated and brought to an end sooner if countercyclical fiscal policy had been used.UPDATEI have recently seen an article by Daniel Kuehn called “A critique of Powell, Woods, and Murphy on the 1920–1921 depression.”This also presents a critique of the Austrian view of the 1920-21 recession: http://factsandotherstubbornthings.blogspot.com/2010/10/1920-21-depression-article-is-on-online.htmlKuehn also draws attention to the role of the Federal Reserve, and argues that its high discount rate (the primary policy tool in those days) in 1920 to combat inflation was a major factor in inducing the recession. APPENDIX 1: GNP ESTIMATESAll GNP figures are merely estimates, since proper data collection was not done before about 1945. There are four important studies on GNP before 1945:Balke, N. S., and R. J. Gordon, 1986. “The American Business Cycle: Continuity and Change,” in R. J. Gordon (ed.), The American Business Cycle, University of Chicago Press, Chicago.Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.Romer, C. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908,” Journal of Political Economy 97.1: 1–37.Ritschl, A., Sarferaz, S. and M. Uebele, “The U.S. Business Cycle, 1867–2006: Dynamic Factor Analysis vs. Reconstructed National Accounts,” January, 2010https://www.ciret.org/conferences/newyork_2010/papers/upload/p_200-500401.pdfThe various estimates for 1920–1921 GNP:The U.S. Department of Commerce = 6.9% GNP declineBalke and Gordon = 3.5% GNP declineRomer = 2.4% GNP decline Balke and Gordon’s figures support a much lower decline for GDP. The estimate of Ritschl, Sarferaz, Uebele (2010) is higher than that of Balke and Gordon and Romer.APPENDIX 2: THE DEPRESSION OF THE 1890sFor data on the persistence of double digit unemployment in the 1890s, see the revised figures in Romer 1986: 31.Year Unemployment rate1892 3.72% 1893 8.09% 1894 12.33% 1895 11.11% 1896 11.965 1897 12.43% 1898 11.62% 1899 8.66% 1900 5.00%The US economy did not return to full employment for nearly a decade after 1893. Contrary to Austrian economic analysis, there is no evidence that the 1890s slump was rapidly ended by a laissez faire economy. In fact, since the US had no central bank in the 1890s, Austrians and other free market libertarians should be doubly embarrassed by the downturn in the 1890s and the persistence of high unemployment and sub-optimum growth.The other widely used estimate of unemployment in the 1890s is the work of Stanley Lebergott. His estimates of unemployment are much higher than Romer’s, so, even if his estimates are invoked as more accurate than Romer’s, they would only make matters worse for the libertarian position.And one might argue that Romer’s estimates are questionable (Lebergott 1992), and at least for the period from 1900-1929 (Weir 1986), as the idea that movements in the labour force were procyclical before 1945 can be challenged: if aggregate participation rates were anticyclical, then Lebergott’s estimates for 1900-1929 may be better (Weir 1986: 364; Weir 1992, however, does agree that Lebergott’s figures for 1890-1899 are too volatile). Here are Lebergott’s estimates of the unemployment rate:Year Unemployment rate 1890 4.0 1891 5.4 1892 3.0 1893 11.7 1894 18.4 1895 13.7 1896 14.5 1897 14.5 1898 12.4 1899 6.5 1900 5.0 BIBLIOGRAPHYAkerlof, G. A. and R. J. Shiller. 2009. Animal Spirits: How Human Psychology drives the Economy, and Why it Matters for Global Capitalism, Princeton University Press, Princeton.Brunner, K. 1981. The Great Depression Revisited, Nijhoff, Boston and London.Carbaugh, R. J. 2010. Contemporary Economics: An Application Approach, M.E. Sharpe, Armonk, New York.D’Arista, J. W. 1994. The Evolution of U.S. Finance, Volume 1: Federal Reserve Monetary Policy: 1915–1935, M. E. Sharpe, Armonk, New York.Knoop, T. A. 2010. Recessions and Depressions: Understanding Business Cycles (2nd edn), Praeger, Santa Barbara, Calif.Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800, McGraw-Hill, New York.Lebergott, S. 1992. “Historical Unemployment Series: A Comment,” Research in Economic History 14: 377–386.Parker, R. E. 2002. Reflections on the Great Depression, Edward Elgar, Cheltenham, Northampton, MA.Romer, C. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94.1: 1–37.Romer, C. 1988. “World War I and the Postwar Depression: A Reinterpretation based on alternative estimates of GNP,” Journal of Monetary Economics 22.1: 91–115.Romer, C. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908,” Journal of Political Economy 97.1: 1–37.Steeples, D. W. and D. O. Whitten, 1998. Democracy in Desperation: The Depression of 1893, Greenwood Press, Westport, Conn.Vernon, J. R. 1991. “The 1920–21 Deflation: The Role of Aggregate Supply,” Economic Inquiry 29: 572–580.Weir, D. R. 1986. “The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability,” The Journal of Economic History 46.2: 353–365.Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html
In the Keynesian world of cognitive dissonance every crash is atypical. In reality it is always essentially the same. They just choose to look at some useless facts and suppose that these somehow make an important difference. In the most recent case Greenspan tried to do the same thing that Strong did. Despite the useless facts, the argument for 1920 is still that trying to prevent hyperinflation caused the crash.
"(1) Duration of the Recession
...Macroeconomic performance after 1945 has been superior, without any doubt, to that of the previous gold standard eras. The recession of 1920–1921 with a duration of 18 months was in fact of long duration relative to the average of post-1945 recessions. Keynesian and even neoliberal economic management of the business cycle has been superior to the system that existed before 1933. "
I find it interesting that he quotes Romer later in this article to say that the Depression of 1920-1921 was not as severe as previously thought, but then he says what I just quoted above; Romer's studies also indicate that recessions of the 19th century are exaggerated because of the data used to calculate them. In fact she came to the conclusion that 19th century recessions were no worse in duration, severity, or frequency than post WWII recessions, and certainly no worse than the inter war period. So contrary to what he's saying here, there is indeed doubt as to whether Keynesian management of the business cycle has been better for the economy.
"APPENDIX 2: THE DEPRESSION OF THE 1890s
...In fact, since the US had no central bank in the 1890s, Austrians and other free market libertarians should be doubly embarrassed by the downturn in the 1890s and the persistence of high unemployment and sub-optimum growth."
The author is clearly ignorant of Austrian Business Cycle Theory. It isn't a central bank that causes recessions, but the suppression of interest rates below the natural rate that sets off the artificial boom. A central bank is certainly useful to this end, but not necessary. And while it's true that there was no central bank, there was the national banking system which practiced fractional reserve banking. It's not as if this was a period of laissez faire in the monetary system. No idea why Austrians should be "doubly embarrassed".
"In fact she came to the conclusion that 19th century recessions were no worse in duration, severity, or frequency than post WWII recessions, and certainly no worse than the inter war period."
No worse than the inter war period? Which means it was pretty bad, given the Great Depression was in the interwar period.
One can consult these as good starting points on pre-1914 GNP:
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92. Romer, C. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908,” Journal of Political Economy 97.1: 1–37.
If Romer is correct:
The 1920-1921 recession lasting 18 months is in fact still <i>a long one</i> by the standards of the post-1945 US business cycle.
The Austrian claim that this recession ended "quickly" is false, relative to post 1945 recessions.
And, of true, Romer’s GNP figures refute the Austrian claim that it was as severe downturn. In fact, the growth path of output was hardly impeded by the recession.
"So contrary to what he's saying here, there is indeed doubt as to whether Keynesian management of the business cycle has been better for the economy"
Utterly untrue - the Keynesian era 1945-1979 was still easily superior to the 19th century in terms of productivity growth, employment, banking stability and the absence of financial crises, even if accept Romer’s GNP figures.
"The author is clearly ignorant of Austrian Business Cycle Theory."
Afraid not:
http://socialdemocracy21stcentury.blogspot.com/2010/10/austrian-business-cycle-theory-its.html
"And while it's true that there was no central bank, there was the national banking system which practiced fractional reserve banking. It's not as if this was a period of laissez faire in the monetary system"
And 1920–1921 was NOT a period of laissez faire in the monetary system either. So why is it endless invoked as if it proves the Austrian position?
If you really believe that 1890s America (where there was no central bank) cannot be invoked as a criticism of Austrian theory, then it is absurd in the extreme for Austrians to invoke 1920-1921 as vindication of their theories, when in that period America had a central bank! By your own definition, it was even less of a laissez faire system than 1890s America.
And, of course, given there was no period in recent history when this fantasy Austrian world of no fractional reserve banking, no fiduciary media, no regulation, and no government has ever existed, you have no empirical evidence <i>whatsoever</i> that such a system would work or be stable.
Nowhere do I say every crash is "atypical."
In fact, the 19th century business cycle was marked downturns essentially caused by excessive debt, bursting asset bubbles, financial crises, and debt deflation.
This is the model of the cycle that is also relevant for 1929-1933 and 2007-2009.
It is not relevant for 1920-1921.
"No worse than the inter war period? Which means it was pretty bad, given the Great Depression was in the interwar period."
I also said, citing Romer, that the 19th century recessions were no worse than the post WWII period and since the inter war period was worse than that, is was simply logical that the 19th century recessions could be no worse than the inter war period. So no, it doesn't mean that it was pretty bad. "No worse than" does not imply "as bad as" (and actually, since I brought up the post WWII period in relation to the 19th century, the 19th century could be as bad as the inter war period).
"The 1920-1921 recession lasting 18 months is in fact still <i>a long one</i> by the standards of the post-1945 US business cycle.
Never said it wasn't.
And, of true, Romer’s GNP figures refute the Austrian claim that it was as severe downturn. In fact, the growth path of output was hardly impeded by the recession."
The fact that it wasn't as severe as previously thought doesn't damage the ABCT.
"Utterly untrue - the Keynesian era 1945-1979 was still easily superior to the 19th century in terms of productivity growth, employment, banking stability and the absence of financial crises, even if accept Romer’s GNP figures."
Actually, according to Romer, the post WWII period wasn't any better. If you have an issue with that, take it up with her.
"Afraid not:
http://socialdemocracy21stcentury.blogspot.com/2010/10/austrian-business-cycle-theory-its.html"
He's the one who said there was no central bank, implying that the ABCT couldn't explain the downturn in 1890. So either he was being dishonest (since he knows the ABCT doesn't require a central bank) or he was being lazy. I was merely pointing out that Austrians have no reason to be embarrassed about it.
"And 1920–1921 was NOT a period of laissez faire in the monetary system either. So why is it endless invoked as if it proves the Austrian position?"
I couldn't tell you. I guess it depends on how little the government and the Fed did in response to the crisis. I haven't studied it enough to make a judgement either way.
"If you really believe that 1890s America (where there was no central bank) cannot be invoked as a criticism of Austrian theory, then it is absurd in the extreme for Austrians to invoke 1920-1921 as vindication of their theories, when in that period America had a central bank! By your own definition, it was even less of a laissez faire system than 1890s America."
Ok. But I never said that the 1920 recession was a vindication of Austrian theory. So...
It seems that way when you don't understand how it works.
This is why I appreciate Esuric so much.
Esuric -
First, thanks for taking the time to read my article. Did you read the SSRN version or the RAE version? The RAE version is much improved, in case you had only read off of SSRN. A few points:
1. You are right to note that it was not my intention to refute the Austrian interpretation of 1920-21. I don't know if we have data that is detailed enough to provide such a refutation if I even thought it could be made. I don't, however, think that means I was quibbling over small points. The three authors that I was critiquing all framed 1920-21 as being a refutation of Keynesianism. My argument is that it is no such thing. I place great value on much of Austrian economics, I don't see Keynesianism and the Austrian school as diametrically opposed in all respects. That is a quite fundamental point to raise given the heat that is generated in these discussions. I don't think it's fair to call it "quibbling".
2. I have to disagree with your characterization of the Tract as "pre-Keynesian". The General Theory's insights had not been fully developed - and you raise a few points that the General Theory makes that the Tract and other earlier does not. I did not - to my knowledge - present anything from Keynes's earlier work that contradicted anything in his later work. Did Keynes develop as an economist? Absolutely. This does not mean that everything before 1936 is a different Keynes. The Tract on Monetary Reform was especially important to mention because it includes Keynes's reflections on American monetary policy immediately after the first World War.
3. In your list of the ideas adopted by Keynes I'm a little confused by why you think he thouht (b.). Your statement of (c.) probably oughta be heavily qualified. It was a policy preference but he always caveated that we would have to see how effective it could be implemented. (d.) is probably also worth qualifying as only being a view he held when the economy was below full employment.
4. Regarding this, <i>"Now it is true that Keynes opposed deflation on all grounds throughout his career, but it’s ridiculous to claim that lowering interest rates, in order to fight general price deflation, is somehow uniquely Keynesian."</i>, I don't think I ever claimed it was uniquely Keynesian. I certainly didn't intend to and it would be a glaring error if I had said that. Again, the point of my article was precisely that 1920-21 does not refute or cause problems for Keynesians. If you agree that Keynes thought this, and was not unique in thinking this, then we seem to be on exactly the same page.
5. To say that this "ignores" Austrian discussions of price distortions is unfair as well. I don't discuss it, that is true. But I had to curtail my discussion of the 1919-1921 period to ensure that the article was of reasonable length. I didn't really have the freedom to go into the causes of the Great Depression. And on the Great Depression, I haven't personally formed an opinion of what role loose monetary policy prior to the bust played in it.
6. Regarding this: <i>" And Strong was actually a Keynesian because he began to reduce the discount rate when the general price level began to fall."</i>, I don't believe I ever claimed that Strong was a Keynesian. Again, if I did claim such a thing that was a major error - it was not my intention. But I don't believe I made such a claim. I certainly don't think that.
7. Regarding this: <i>"The fact that Kuehn does not distinguish between early Keynes and what is now known as Keynesian economics is odd, to say the least"</i>, this was a concern of one of my two reviewers too. If you have not gotten a chance to read the RAE version, you should try to get a hold of it. I addressed these concerns by citing several sources highlighting the continuity of Keynes's thought. The change in his thought was in terms of the determination of the interest rate and the utilization of the multiplier to construct a fuller theory of effective demand. He did not have this theory in 1923, it is true. But nothing that I wrote, to my knowledge, was especially impacted by his lack of a theory of effective demand at that point. If you think the underdevelopment of his thought changes my argument at all, I'm happy to hear how. I plan on continuing to study the 1920-21 downturn as well as the Keynesian revolution more broadly. But this criticism of yours remains vague. I simply don't see the point you're trying to make. How does this change the analysis? What do I cite in 1923 that he would not have said again in 1936? What is wrong with citing what he said in 1936 to explain how we should understand the implications of 1920-21 for what we now call "Keynesianism"?
8. Your sixth paragraph is alternatively (1.) reading me too strongly once again, (2.) adequately explained in the article, or (3.) addressing questions that were out of the scope of the article. Regarding this point: <i>"Of course this theory explicitly ignores all of the various policy mistakes made by the Roosevelt and Hoover administrations that led to extreme price rigidity in the labor market."</i>, I'd refer you to Keynes's chapter on money wages. The discussion absolutely doesn't ignore such policies.
9. Regarding this, <i>"Kuehn addresses this but then dismisses it on the grounds that Keynes’ theories in the General Theory are not universal, but only apply to major depressions"</i> - I'm quite confident I don't claim this either. The General Theory does apply universally. What it does not do is provide an exhaustive account of employment and output, nor does it make the claim that effective demand is always the cause of depressions. Some very deep depressions, like 1920-21, are not caused by effective demand problems at all. Some, like the Great Depression and the current downturn are. And it's very possible that distortion of the capital structure is also a contributor to all three of these discussions. I don't know enough to say whether it is or not, and how substantial a contributor it is.
10. Regarding this: <i>" which led to a sharp but extremely short and orderly recession"</i> - extremely short?!? It was tied for the second longest American depression on record (tied with the current downturn) after the creation of the Federal Reserve. That's not what I call "short".
11. Regarding this: <i>"Thus, the only way that Strong and Harding’s policies could be considered “Keynesian” is if we redefine what “Keynesian economics” (not referring to the new Keynesian synthesis) is"</i>, have to once again repeat that I don't call Strong and Harding "Keynesian". I say that Keynes would not have disagreed with them in 1923 or in 1936. Milton Friedman would not disagree with them either, and that doesn't make Friedman "Keynesian" any more than it makes Harding a Monetarist. My point is that we approach economics as if it were a clash of the titans. There are important disagreements, but in many circumstances there are no fundamental disagreements. This is appears to be one of them.
Some very deep depressions, like 1920-21, are not caused by effective demand problems at all.
And it is not even clear that 1920-1921 was a "deep depression" at all.
This is the problem with many Austrians - they don't pay attention to the relatively recent literature on GNP estimates in relation to 1920-1921, even though they love to invoke it to defend output volatility in the 19th century:
The various estimates for 1920–1921 GNP: Balke and Gordon = 3.5% GNP decline Romer = 2.4% GNP decline
If Romer is right, this wasn't even a depression - it was a moderate recession.
The Austrian claim that this was a severe depression (where output fell by 10% or more) that was ended by laissez faire is false.
In reality, the growth path of output was hardly impeded by the recession (Romer 1988: 108–112).
Kuehn's argument that recessions were far shorter in the post war and inter war periods i find to be a little disengenuous.
First, I find an error in his focus on "averages". The average recession might have been shorter in the post-war period but the fact of the matter is, most of the major economic events have occured under the federal reserve. The Great Depression happened on the feds watch, stagflation happened on the watch of keynesianism and the current financial crisis occured under the fed. There may have been depressions under the gold-standard, but nothing on the scale of the 1930s or the stagflation of the 70s. No economic correcton lasted longer than five years under gold. You may say that keyesianism has ended the current recession, but that has yet to be seen. The Austrian have always agreed that fiscal and monetary stimulus can have short term economic impact, but the argument is that eventually it will stall and the economy will fall apart. We can see this with Japan, and eventually I think we'll see it with the US and Europe. If this current recession turns into the disaster Austrians think it will, I think those "averages" might change a little.
Second, I find an error in your exclusive focus on American economic history. As a matter of fact, many other countries had far more stable economic systems than the United States in the 19th century, even without a central bank. Canada for instance did not get its central bank untill 1935 and its monetary history was far more stable than that of the United States. the same is true of the free-banking era in Australia. The Australian economy only experienced two economic depressions in the 19th century. One in 1840 and another in 1890. Both were short and sweet. A similar history can be seen in Switzerland and Sweden in the 19th century.
The last problem is the big question. Why exactly didn't the great depression occur in the 19th century? I mean, if a central bank is neccessary, wouldn't you have expected to have seen a non-self correcting depression sooner? Heck, why didn't the great depression occur in Canada rather than the United States?
The Australian economy only experienced two economic depressions in the 19th century. One in 1840 and another in 1890. Both were short and sweet.
You couldn't be more wrong. The 1891-1894 depression in Austrlia was a catastrophe: it caused mass unemployment that persisited for nearly a decade and stagnation even though a techical recovery began in 1895.
And as for the free banking system, it resulted in utter catastrophe:
Charles R. Hickson and John D. Turner, 2002, “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
In the Austrian bizarro world, a 3 year contraction, and another 4 years of stagnation is "short and sweet"
Regarding this: <i>"The fact that Kuehn does not distinguish between early Keynes and what is now known as Keynesian economics is odd, to say the least"</i>, this was a concern of one of my two reviewers too. If you have not gotten a chance to read the RAE version, you should try to get a hold of it. I addressed these concerns by citing several sources highlighting the continuity of Keynes's thought.
I read the SSRN version, but I’ll read the RAE version when I find it.
In your list of the ideas adopted by Keynes I'm a little confused by why you think he thouht (b.).
Keynes, in chapter 21 of the GT, claims that the general price level is partially determined by the rate of employment and partially determined by the “wage-unit.” The total supply of money in circulation only affects the general price level when there is a full utilization of resources (when the economy is operating at “full capacity”) because it elevates the rate of employment and nominal wage rates. He states,
Keynes: If we allow ourselves the simplification of assuming that the rates of remuneration of the different factors of production which enter into marginal cost all change in the same proportion, i.e. in the same proportion as the wage-unit, it follows that the general price-level (taking equipment and technique as given) depends partly on the wage-unit and partly on the volume of employment.
I think he homogenizes all factors of production into labor, and the wage-unit represents the remuneration to all fops.
(d.) is probably also worth qualifying as only being a view he held when the economy was below full employment.
Yes but Keynes claimed that the economy is in equilibrium (full employment) either by design or by chance (there is no third option for Keynes).
The change in his thought was in terms of the determination of the interest rate and the utilization of the multiplier to construct a fuller theory of effective demand. He did not have this theory in 1923, it is true. But nothing that I wrote, to my knowledge, was especially impacted by his lack of a theory of effective demand at that point.
Keynes was nowhere near the General Theory 1923. He did not develop:
By 1936 he also believed that interest was solely a monetary phenomenon and that savings is actually a function of income (rather than interest rates). There are also more technical differences regarding the treatment of working and circulating capital that I’m not really qualified to go into.
Keynes himself explicitly proclaimed that the GT was entirely novel and revolutionary (something that many Austrians in the 50s, 60s, and 70s refuted). He wrote to Hayek that he no longer believed much of what he wrote in his Treatise on Money, and his earlier works (Indian Currency and Finance [1919]and Tract on Monetary Reform [1923]) dealt almost exclusively with monetary reform where his views were hardly controversial. Keynes also went through a political transformation where he began as a liberal and became an interventionist who didn’t believe in markets (The End of Laissez-Faire [1926] was the beginning of this transformation which culminated with the GT where he explicitly endorses Mercantilism).
You specifically claim:
Daniel Kuehn: Despite his general aversion to deflation, Keynes makes clear at several points that the primacy he places on price stability may necessitate a contractionary monetary policy, particularly in the aftermath of an inflationary episode. In this sense, American monetary and fiscal policy through 1920 was entirely consistent with Keynesianism…. Keynes clearly suggests in the Tract that the inflation of the money supply can have a “more than proportionate effect” on the price level (82), and that the appropriate policy in such a situation is to apply contractionary monetary policy.
Again, the highlighted assertion only makes sense if we ignore Keynes’ theoretical transformation from essentially a Monetarist to a Keynesian (as is commonly understood). GT Keynes would never advocate contractionary monetary policy if it meant involuntary unemployment (which is, according to Keynes, self-reinforcing). Price stability becomes of secondary importance in the Keynesian system behind full employment. If we accept the validity of the highlighted assertion than Volcker's actions were also 'consistent' with Keynesianism.
The Keynesian remedy is to apply both monetary and fiscal stimulus during a recession, and it clearly states that the latter is more effective relative to the former, which suffers severe limitations (this issue was at the very core of the heated debates in the 80s between the Monetarists and the Keynesians). Additionally, American monetary policy was hardly expansionary by today’s standards, or even by the standards of the 30s. This is primarily due to the fact that open market operations did not exist until the recession was over and the U.S. was still on the gold standard.
So again, American monetary and fiscal policy was hardly consistent with Keynesianism unless we’re willing to redefine what Keynesian economics is, i.e., if we fuse Keynes’ earlier works with his later works (which are dramatically different).
Regarding this, <i>"Kuehn addresses this but then dismisses it on the grounds that Keynes’ theories in the General Theory are not universal, but only apply to major depressions"</i> - I'm quite confident I don't claim this either. The General Theory does apply universally.
You claim that:
Daniel Kuehn: The traditional Keynesian view outlined in The General Theory of Employment, Interest, and Money ([1936] 1997) would seem to embrace monetary and fiscal stimulus, with a measured skepticism about the limitations of monetary policy as a recovery tool. However, these prescriptions were intended to address a very specific diagnosis, most notably the economic conditions of the 1930s.
You also claim that Keynes’ rejection of nominal wage adjustments is conditional, but this completely contradicts Keynes’ treatment of the labor market in the General Theory (chapter 19, I believe).
I don't see Keynesianism and the Austrian school as diametrically opposed in all respects. That is a quite fundamental point to raise given the heat that is generated in these discussions.
I agree. I believe that Keynes was, up until the General Theory, merely a confused Austrian economist who misunderstood the Wicksellian framework. Specifically, his analysis almost exclusively revolved around a particular type of inter-temporal disequilibrium, when the money rate of interest rises above the natural rate (a concept he would abandon in the GT) due to an elevated demand for money (what he called the precautionary demand for money). The effects of which resemble a state of inadequate effective demand but which is merely a consequence of a malformed capital structure attempting to re-align itself with actual preferences and real economic conditions. Keynes' entire analysis deals with a potential consequence (what Hayek called secondary phenomena) of an ABC.
Either way, I believe that pre GT Keynes is more in line with Austrian economics than, say, new classicism. In fact, a few Austrian economists consider themselves to be Keynesian in some respects (Lachmann, for example, called himself an Austro-Keynesian).
Roger Garrison, in Time and Money, warns of treating Keynes' theory of disequilibrium as one of monetary disequlibrium. He argues that even assuming that the entirety of newly saved money was represented in the loanable funds market, there is no price mechanism which in turns provides an incentive for entrepreneurs to necessarily invest that newly saved money in the capital goods market. Keynes makes this claim, because he assumes that the fall in the price of consumer goods will necessarily be a disincentive to investment.
Lord Keynes: In the Austrian bizarro world, a 3 year contraction, and another 4 years of stagnation is "short and sweet"
In Keynesian Bizzaro world, the period between 1945 and 1980 was one of macroeconomic stability, even though there were 8 recorded recessions during this period, two of which lasted for 16 months, and a decade of stagflation which nearly crippled the British economy. Either way, please stop derailing my thread. This thread is about some issues I have with Daniel Kuehn's paper, namely the fact that he doesn't distinguish between early Keynes and GT Keynes (In the SSRN version), his attempt to portray GT Keynes' as an anti-inflationist, and the claim that Strong and Harding's policies were consistent with the Keynesianism framework (as is commonly understood).
Of course Volcker's actions were consistent with Keynesianism! This is precisely the sort of argument I'm making for strong. Were you under the impression we had an effective demand problem in the 1970s?
You don't have to fuse his earlier works with his later works to conclude the Keynes would not have supported fiscal policy in 1920-21 or the 1970s. You only need the General Theory to show that fiscal policy is a response to demand deficiencies. I also added earlier works (which were consistent) to provide more information on his response to monetary policy in 1920-21 (which you yourself agree was not controversial or unique!).
Regarding this: "You also claim that Keynes’ rejection of nominal wage adjustments is conditional, but this completely contradicts Keynes’ treatment of the labor market in the General Theory (chapter 19, I believe).", what are you talking about? I got the conditionality of the claim from chapter 19! It does contradict a popular caricature of Keynes. But it does not contradict chapter 19 or anything else in the General Theory.
You couldn't be more wrong. The 1891-1894 depression in Austrlia was a catastrophe:
A 3 year recession is still short. It may not have been "sweet" but persistently high unemployment is not something that is unknown to the modern economy either. The receesion was still less severe than the great depression and recovered without fiscal stimulus. The depression was caused by outside factors anyway. You also completely ignore the earlier 1840s depression which was less severe, and the fact that the Australisn economy only experienced TWO depressions in the whole of the 19th century, that means they experienced at least 40 straight years of monetary stability. I would say that is a pretty good economic situation wouldn't you?
You completely ignored the other countries I cited as well, which did not have an economic depression to the same extent as australia. Switzerland, Sweden and Canada. You still have not accounted for the fact that the great depression occured under the fed rather than under the 19th century gold standard.
Is there a link to Daniel Kuehn’s paper? If you wish, you can private message it to me.
"A 3 year recession is still short."
A 3 year recession is long by the historical standard of the business cycle, and certainly by the post 1945 business cycle.
"The receesion was still less severe than the great depression and recovered without fiscal stimulus."
Again, totally wong. Australian economists have estimated that Australia's 1890s depression was probably WORSE than Australia 1930s depression.
"The depression was caused by outside factors anyway."
The severity of the depression was caused by a domestic asset bubble in property, a bursting bubble, a major financial crisis and mass banking failures of Australia's free banking system - there was nothing external about that:
The average duration of recessions in peacetime from 1854 to 1919 was 22 months ... the average duration of recessions from 1919 to 1945 was 18 months ... The average duration of US recessions in the post-1945 era ... has been about 11 months
the average duration of recessions from 1919 to 1945 was 18 months ...
The average duration of US recessions in the post-1945 era ... has been about 11 months
Ok, recessions get shorter. That's no surprise, everything moves faster in the modern world. Computers wire money in seconds, often automated, it would be surprising if recessions didn't play out faster. But somehow that observation is taken as proof that countercyclical policies work. But that is just a correlation, the era of Keynesian stimulus just happens to come later in time.
No, the internal asset bubble was caused by foreign capitali flows I.e. "external" factors. Secondly, a world wide depression occured in 1893 that started in the unted states (on the back of the free-silver movement, something which the people on this forum have yet to bring up...) that also contributed to the severity of the recession.
An investment boom in Australia in this decade saw increased economic expansion despite the fact that the investments were providing less of a return. This can be attributed to foreign funds' becoming more available to Australia. This influx of capital led to Australians' experiencing the highest per capita incomes in the world during the late nineteenth century. However, by the end of the decade 1880-1890, overseas investors became more concerned with the difference between expected returns and actual returns on Australian investment and withdrew further funding. Consequently Australia saw the start of a severe depression starting in 1890. Australian economic historian Noel Butlin would later argue that the history of Australian settlement has been one of growth financed by foreign capital, punctuated by depression caused by balance of payments crises after a collapse in property prices and exacerbated by the imprudent use of capital. http://en.wikipedia.org/wiki/Economic_history_of_australia#1880_-_1890
However, by the end of the decade 1880-1890, overseas investors became more concerned with the difference between expected returns and actual returns on Australian investment and withdrew further funding. Consequently Australia saw the start of a severe depression starting in 1890. Australian economic historian Noel Butlin would later argue that the history of Australian settlement has been one of growth financed by foreign capital, punctuated by depression caused by balance of payments crises after a collapse in property prices and exacerbated by the imprudent use of capital.
http://en.wikipedia.org/wiki/Economic_history_of_australia#1880_-_1890
Even still, how do you explain the 40 straight years of economic porsperity? How do you explain the shortness of the 1840s recession?
What about Canada, Switzerland and Sweden? Where was their economic depression?
"No, the internal asset bubble was caused by foreign capitali flows I.e. "external" factors."
It was aided by and made worse by inflows through the capital account, but the investment decisions that drove the bubble were made largely by the Australian banks - this was an internal factor.
The quote you use says "a collapse in property prices and exacerbated by the imprudent use of capital." And who was it who was responsible for the
"imprudent use of capital"? It was the Australian free banks.
The financial crisis was also an internal factor, as were the bank runs and collapses and debt deflationary spiral.
"Even still, how do you explain the 40 straight years of economic porsperity?"
There WASN'T "40 straight years of economic porsperity". This is completely false. Do you even look at basic economic studies?
Australia had moderate to severe recessions in 1867, 1878-1879, and 1885-1886.
http://books.google.com.au/books?id=yTKFBXfCI1QC&pg=PA451&dq=australia+recession+1870s&hl=en&ei=_ac3TYeUOYiecZrciJMC&sa=X&oi=book_result&ct=result&resnum=7&ved=0CEgQ6AEwBg#v=onepage&q=australia%20recession%201870s&f=false
You don't seem to understand ABCT. The foregin capital flows are where the banks got the money. Yes, the banks themselves made the "mal-investments", but that is completely compatable with ABCT. The foregin capital flows are what drove down the interest rate and brought on the sepculative bubble.
There WASN'T "40 straight years of economic porsperity". This is completely false. Do you even look at basic economic studies? Australia had moderate to severe recessions in 1867, 1878-1879, and 1885-1886.
Wow! they had 3 moderate recessions? That sooo unstable! Wait? Didn't we have 8 recessions in the post World War 2 keynesian era, culminating in stagflation?
Anyway, I did not say there were "no recessions" during this time period. I said it was 40 straight years of prosperity. 3 recessions in 40 years is still economic prosperity. It is about as good, if not better than the post WWII keynesian era, which you people call "economic prosperity". Further more, the free-banking system was also not "full-reserve", so, yeah there would still be some boom-bust. My conclusion from this data is that there is no reason to be believe that free-banking is especially ustable, or that central banking is especially stable. We had the great depression under the fed, and we still had plenty of recessions under Keynesianism