Let's say I'm a fervent keynesian, I show up on Mises forum and I say:
I think Bernanke is doing a great job.
Look at the 1929 depression:
- it was caused by an unregulated market, so regulations are good
- it was continuing because of too few cash circulating, so stimulus is good
Let's see if you make me change my mind about this.
As you might have guessed, this has been gone over ad nauseum...
It's all right here:
And here's a nice little snippet:
And of course there's plenty of lectures on this...
And if you need more on why WWII didn't "get us out of the Depression", see here.
Well, I mean a chapter or two in either one of those would do it, but obviously I figure the more resources made easily available, the better.
But if you want the short answer:
a) The market wasn't "unregulated", so that couldn't have been the cause of the crash.
b) Even to the degree that the market was free, a lack of regulation was not the cause of the crash, let alone the Depression that followed for more than a decade.
c) There is no such thing as "too few cash circulating." The Depression was extended and exacerbated by government intervention, beginning with the Smoot-Hawley Tariff Act, and continuing with FDR's alphabet soup...as Sowell outlines. FDR issued more Presidential executive orders than all subsequent presidents throughout the rest of the century.
As you can probably guess, short answers like that are not going to convince anyone like your friend. Indoctrinated myths like the ones you named are not at all easily let go of. It's very difficult for people to realize (let alone admit) they've been wrong about something their whole life, even when they're faced with all the facts...so there isn't much you could hope to do with "brief answers" to such big questions.
This is why I provided the sources. You can download America's Great Depression for free in the "resources" section at that link. All of those lectures are obviously free on youtube. All the answers are right there for you and anyone else to learn. And if you ever wish to be able to convince anyone, you probably should. Otherwise, why should they listen to you? It would be the blind leading the blind, would it not?
Would you read two books to change minds?
You should read about the actual regulatory history in those days, but no matter when it's taking place, regulation is a barrier to entry controlled and/or surpassable by the big fish. Regulation is pointless if Congress is effectively owned by industry lobbyists, and any other form of 'regulation' is a revolving door for the same guys who run Wall Street.
As for stimulus spending, you can mention the broken window fallacy. If someone's window breaks, the fact that they have to consume to get it fixed doesn't make them any richer.
What the Keynesian is really suggesting is that consumption should be forced, because otherwise people will just save their money forever and never spend it on anything. It doesn't matter so much what they spend it on, as long as it is spent, IMMEDIATELY.
Now, what's really going to happen if lots and lots of people are left to their own devices to save is that the interest rate will be naturally driven down, because there's a greater supply of money available for people to borrow, allowing for investment in healthy and sustainable growth as consumers are able to spend their savings on exactly what they want, when they want it. The system does seek a state of equilibrium when it's left alone.
The Keynesian thinks that this happens too slowly, or something... That deferred consumption in the form of savings is some sort of waste of time, and that the government is in a position to cut to the chase - the spending - by forcing the taxpayer to spend right now on anything, absolutely anything...
It leads to the boom-bust cycle... Forcing the taxpayer to spend money on something they don't really want right now artificially elevates the apparent value of that something until such a time as the artificial stimulus is no longer available, and then the bubble pops.
For people, money is a means to an end. It's good for spending now, or spending later, on the real things one actually wants. That's the utility of money, for an individual person. For Keynesians, money is wealth in itself, and when you have a lot of money sloshing around the balance sheets, things must be going great, even if the money is being spent on things no one in their right mind would want. Incredibly, for those Keynesians who believe that WW2 ended the Great Depression, it doesn't matter that the money was being spent on killing millions of people and laying waste to half a continent.
I mean, they've lost the plot. One is not being an economist by manipulating demonstrated preference with force. You supposed to tell people how they can most efficiently get what they want, not what they should want.
It is a good system for fleecing sheep. It is not a good system for making the sheep wealthier.
If markets are prone to fall into depressions that can only be solved by Keynesian policies or long amounts of time, why have we not had longer depressions than the Great Depression before Keynesianism?
Ask the Keynesian if the stimulus enacted during the Great Depression was good, why was the Great Depression the longest depression in history. Is it just a coincidence that the first time Keynesian like stimulus was tried that the longest depression in history occurred? Or is it likely that the stimulus made it harder to recover? Make them answer this question. They will avoid answering it and change the subject because, they can't answer it. Keep reminding them that they have not answered the question. They will get frustrated because it causes cognitive dissonance, by showing them empirical evidence that Keynesian policies may be the cause and not the solution. It forces them to hold two definitions of the severity of the great depression at the same time. One that it was the worst that any depression in history needing unprecedented Keynesian policies and on the other hand it was better than the old days before Keynesian policies.
Why were there no depressions longer than the Great Depression before Keynesianism?
Ok, thank you, but I was wondering how could someone briefly answer to those questions.
I don't think he'd read two books to change his mind ;-)
Perfect, thank you! :)
Thank you guys, excellent replies.
I would agree that Smoot-Hawley was the main trigger that turned the world towards depression, and I think this is widely accepted by all economic schools of thought. What I am not so certain of is whether or not 'Keynesianism' was actually applied during the GD. I mean, the General Theory wasn't published till 1936?
What is the definition of Keynesianism that you are using here if not the application of the General Theory?
The General Theory was apologetics for what was already being applied by Hoover and then FDR for years.
'Course, you have to read up a bit to see the evidence for that.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
That's a new one. Wikipedia says Hoover raised taxes in 1932.
Here's what Keynes prescribed for the Great Depression, according to wikipedia:
Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[5]
Note that there is no mention of cutting taxes. Please show me some evidence of Keynesians calling for tax cuts during the Great Depression.
Now maybe some of the smarter ones, 50 years later, after seeing what a total flop their policy was, decided to make excuses and said, "Oh, did we forget to mention that you should cut taxes?" though I would like to see evidence for that, too.
Hoover and FDR did all that Keynes would have wanted of them before the book was written. The Hoover Dam, that great Keynseian white elephant, was started and finished before the General Theory was written.
Yes. Hoover raised taxes. That's one of the things that Keynesians cite as making the GD worse.
Note that there is no mention of cutting taxes.
Note also that there is no mention of increasing them.
Please show me some evidence of Keynesians calling for tax cuts during the Great Depression.
Like I said, Keynes did not publish the General Theory till '36 so there would have been no 'Keynesians' to call for anything. Certainly, there will have been people proposing all sorts of solutions - some of which were semi-Keynesian in appearance. However, witout a theoretical foundation for policy proposal, most of what went on in the New Deal was just ad hoc, 'try-it-and-see' stuff.
I will try to find some direct sources from Keynes, but for now there is this;
Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labour, and if all else is constant, lowers the unemployment rate. (The connection between demand for GDP and unemployment is calledOkun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though which method has a better stimulative economic effect is a matter of debate.
http://en.wikipedia.org/wiki/Deficit_spending#Keynesian_Effect
I will try and get a better source, but you may be completely correct that it was later Keynesians that claimed tax cuts were beneficial. All I know is that modern Keynesians (or rather neoclassicals) adopt this perspective.
A marginally better source;
http://money.cnn.com/2010/02/04/news/economy/meltzer_keynes.fortune/
"Keynes wanted deficits to be cyclical and temporary. He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits. "
He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits