On Learning the Real Lessons of the 1930s Depression
Tom Clougherty (29 July) writes on the Adam Smith Institute Blog (HERE): a revealing and excellent account of the mythical explanations of what prolonged the Great Depression in the 1930s and what actually was its likely cause, contrary to Maynard Keynes’ widely accepted narrative in his 1936, General Theory, and in the post-war teachings of modern universities, up to the 1980s (which I, and members of the post-war university generation of economists took as gospel).
Follow the link and read Tom’s account. I have selected one paragraph from it for comment on the largely ignored side effect of the debate on Keynes’ narrative.
“Debunking the Great Depression Myth”
‘Indeed, Roosevelt was heavily influenced by his 'brains trust', which in turn was influenced by a variety of collectivist ideologies – progressivism, corporatism (of the European fascist variety), and socialism. The common theme was 'scientific' economic management by enlightened central planners, and a rejection of the free market. And, OK, perhaps that went beyond what Keynes himself would probably have advocated.”
Features of this debate are long forgotten but at the time it had some interesting side effects. People debating competing practical policies also rely on (and imply) competing theories. In the 1930s, the presence of Soviet Communism with the first of its 5-year plans’ counter-poised to capitalism, with its supposed ‘laissez-faire’ theories (though not so evident practices – tariffs, etc.,). This was the main political challenge in Europe (from the growth of communist and socialist labour parties) and in the USA (leftish Democrats v rightist Republicans), to which were added rapid military expansion into Western Europe by the Soviet Army and, in China, the seizure of power by Mao's Red Army.
Economists responded to the alleged virtues of state planning with claims for the benefits of markets and this was, perhaps, sourced from the distorting oral traditions in Cambridge, England, and Chicago, of claims for market-superiority based partly on (invented) attributions about Adam Smith’s supposed ‘invisible hand’. Oscar Lange, a Marxist economist (On the Economic Theory of Socialism, 1936 & 1938), asserted that socialist state-planning was a substitute for the market's invisible hand and claimed that socialism would do much better in directing the economy to its most productive uses than the unreliable and uncertain invisible hand:
“The market has, therefore, been compared to that of an invisible hand which produces co-ordination out of the autonomous decisions of many separate units. Not all markets, however, are able to produce such coordination, nor is the coordination obtained always consistent with accepted social objectives. In such cases, planning is used to either reach the co-ordination, otherwise unobtainable or to correct the co-ordination produced by the invisible hand of the market” (Lange 1945, 26).
Paul Samuelson, while an undergraduate at Chicago, was taught that the invented ‘invisible hand’ theory belonged to Adam Smith, and in his famous and popular textbook (Economics: an introductory analysis, 1948, p 36) responded implicitly to the challenge of socialist planning by placing Smith’s alleged theory of the invisible hand as relevant only to a purely laissez-faire economy but not to a post-war mixed capitalist economy. This perpetuated a myth about Adam Smith (he never saw the metaphor of an invisible hand as connected to markets), but the belief that he did, became (and still is) ubiquitous.
It helped cement Keynes’ narrative of the Great `Depression’ – he referred to the alternatives of democratic governments’ demand management as an alternative to laissez-faire, classical 'do nothing' policies that allegedly were believed and advocated by ‘classical’ economics as best way to respond to crises. Keynes created a narrative of the causes of the 1930s depression that is now widely accepted along with its (not Smith’s) failures of ‘an invisible hand’, which is heard often in today’s debates on the current recession. Some politicians that it was the alleged absence of 'regulation' and state intervention –and a belief in 'laissez-faire' - that led to these crises in the first place and they advocate, instead, more regulations and more state stimulation by ‘quantative easing’, ‘subsidies’ and even ‘more borrowing’ (after the state’s credit cards are already ‘maxed out’!).
As the real lessons of the 1930s depression have not featured much in today's debate (and Tom Cougherty post is an excellent place to start) it might help clarify what is needed by paying close attention to it.
[Disclosure: I am a Fellow of the Adam Smith Institute.]
Follow the link and read Tom’s account. I have selected one paragraph from it for comment on the largely ignored side effect of the debate on Keynes’ narrative.
“Debunking the Great Depression Myth”
‘Indeed, Roosevelt was heavily influenced by his 'brains trust', which in turn was influenced by a variety of collectivist ideologies – progressivism, corporatism (of the European fascist variety), and socialism. The common theme was 'scientific' economic management by enlightened central planners, and a rejection of the free market. And, OK, perhaps that went beyond what Keynes himself would probably have advocated.”
Features of this debate are long forgotten but at the time it had some interesting side effects. People debating competing practical policies also rely on (and imply) competing theories. In the 1930s, the presence of Soviet Communism with the first of its 5-year plans’ counter-poised to capitalism, with its supposed ‘laissez-faire’ theories (though not so evident practices – tariffs, etc.,). This was the main political challenge in Europe (from the growth of communist and socialist labour parties) and in the USA (leftish Democrats v rightist Republicans), to which were added rapid military expansion into Western Europe by the Soviet Army and, in China, the seizure of power by Mao's Red Army.
Economists responded to the alleged virtues of state planning with claims for the benefits of markets and this was, perhaps, sourced from the distorting oral traditions in Cambridge, England, and Chicago, of claims for market-superiority based partly on (invented) attributions about Adam Smith’s supposed ‘invisible hand’. Oscar Lange, a Marxist economist (On the Economic Theory of Socialism, 1936 & 1938), asserted that socialist state-planning was a substitute for the market's invisible hand and claimed that socialism would do much better in directing the economy to its most productive uses than the unreliable and uncertain invisible hand:
“The market has, therefore, been compared to that of an invisible hand which produces co-ordination out of the autonomous decisions of many separate units. Not all markets, however, are able to produce such coordination, nor is the coordination obtained always consistent with accepted social objectives. In such cases, planning is used to either reach the co-ordination, otherwise unobtainable or to correct the co-ordination produced by the invisible hand of the market” (Lange 1945, 26).
Paul Samuelson, while an undergraduate at Chicago, was taught that the invented ‘invisible hand’ theory belonged to Adam Smith, and in his famous and popular textbook (Economics: an introductory analysis, 1948, p 36) responded implicitly to the challenge of socialist planning by placing Smith’s alleged theory of the invisible hand as relevant only to a purely laissez-faire economy but not to a post-war mixed capitalist economy. This perpetuated a myth about Adam Smith (he never saw the metaphor of an invisible hand as connected to markets), but the belief that he did, became (and still is) ubiquitous.
It helped cement Keynes’ narrative of the Great `Depression’ – he referred to the alternatives of democratic governments’ demand management as an alternative to laissez-faire, classical 'do nothing' policies that allegedly were believed and advocated by ‘classical’ economics as best way to respond to crises. Keynes created a narrative of the causes of the 1930s depression that is now widely accepted along with its (not Smith’s) failures of ‘an invisible hand’, which is heard often in today’s debates on the current recession. Some politicians that it was the alleged absence of 'regulation' and state intervention –and a belief in 'laissez-faire' - that led to these crises in the first place and they advocate, instead, more regulations and more state stimulation by ‘quantative easing’, ‘subsidies’ and even ‘more borrowing’ (after the state’s credit cards are already ‘maxed out’!).
As the real lessons of the 1930s depression have not featured much in today's debate (and Tom Cougherty post is an excellent place to start) it might help clarify what is needed by paying close attention to it.
[Disclosure: I am a Fellow of the Adam Smith Institute.]
Labels: Oscar lange, Paul Samuelson, Recession, The Great Depression
