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Gerard
Jackson
This
is a general response to a comment posted by Nottrampis. Once I began to
write I realised my reply would be better as a post rather than a comment.
No
matter what Keynesians argue, investment is not driven by consumer spending.
This fallacy is based on a total misunderstanding of the nature of derived
demand. (I shall deal with this fact in later posts). Investment is driven by
the prospect of profit. In a free market the rate of interest determines the
length of investment projects. Consumer spending has nothing to do with it.
In a
multi-stage economy it is the volume of business spending that determines
consumer spending. If it were otherwise the consumer goods producing
industries would be less stable than the capital goods industries. They are
not. No matter what any Keynesian asserts, the fact remains that the largest
number of payments is not made by consumers to producers but between
producers and producers, meaning that it is production that creates
purchasing power and not wages. (Say’s Law again).
Now for
some facts: It was estimated that out of the 14 million unemployed in March
1933 only about 1.5 million came from the consumer goods industries. This
situation was entirely due to the colossal failure of the Hoover
administration to grasp the reality of gross business spending. Unfortunately
for the world Roosevelt was every bit as bad.
More
facts for the crucial period 1929-1933: In 1929 the two-way division between
employees and corporations was 81.6 per cent and 18.4 per cent respectively.
By 1933 the employees share had rocketed to 99.4 per cent, payrolls fell from
$32.3 billion to $16.7 billion and unemployment rose to 25 per cent. In the same
period labour’s proportion of national income rose from 59 per cent to 73 per
cent. Additionally, personal consumption as a proportion of GNP rose from 76
per cent to 83 per cent.
While
every point I have raised here will be dealt with in much greater detail at a
later date one thing does remain: the facts of the Great Depression do not
support Keynesianism.
You
wrote: “funny how there is no golden age in countries following classical
economics”. You are wrong again. The nineteenth century was, at the time,
considered the greatest because of its industry, inventions and growth in
living standards. What gave us the nineteenth century is the same thing that
laid down the foundations of our present prosperity. Compared to what
preceded it, it was indeed a Golden Age.
As for
Hawtrey, I have not read all of his books but I have read Century of bank rate, Good and Bad Trade, Art of central banking, and Currency and Credit. From an Austrian
perspective his analysis of the trade cycle is dangerously wrong. With respect
to Hawtrey warning about the Great Depression I presume you are referring to
Ronald Batchelder and David Glasner’s paper Pre-Keynesian Monetary Theories of the Great
Depression: What Ever Happened to Hawtrey and Cassel?
It is
true that Hawtrey and Cassel expressed warnings but so did others. Writing
for the Austrian Institute of Economic Research Report, February 1929, Hayek
successfully predicted that “the boom will collapse within the next few
months.” Colonel E. C. Harwood — who founded the American Institute for
Economic Research — persistently warned that the Fed’s monetary policy would
cause a depression. Benjamin M. Anderson used his position as chief economist
at Chase National Bank and editor of the Chase
Economic Bulletin to sound the alarm about the Fed’s monetary
policy and the coming crisis that it was generating. Then there was Ludwig
von Mises who had been warning for years that the central banks’ loose monetary policies would
bring on a depression.
The
brilliant Mr Keynes was not so prophetic. Felix Somary, a Swiss banker,
recalled in his The Raven of Zurich
(London: C. Hurst, 1960) that Keynes had approached him in the mid-20s for
stock recommendations. Somary, who subscribed to the Austrian School of
economics, refused to give him any, warning that a speculative bubble was
emerging. Keynes cockily replied: “There will be no more crashes in our
lifetime.” The financial collapse apparently did nothing to dent his
self-confidence. Once the depression was underway he still hailed the price stabilization
scheme that caused it as a “triumph.” When it suited him, Keynes’ conceit
apparently left him unfazed by mere facts.
Hawtrey
and Cassel, according to Batchelder and Glasner, blamed gold for the
depression. The others I mentioned blamed the Fed’s loose monetary policies
and its religious-like faith in a stable price level. Under the influence of
Irving Fisher virtually the whole of the American economics profession had
fell prey to the fallacy that a stable price level means there is no inflation.
Yet it is this fallacy that led to the crash of 1929. The irony is that Ralph
Hawtrey was one of the guiding lights of this dangerous policy.
Note: I believe that when dealing with the
boom-bust phenomenon economists must also adopt a historical perspective. For
any theory of booms and busts to be correct it must, like the laws of supply
and demand, apply to all places at all times. This is why I shall be posting
articles on medieval booms, Tulip Mania, the South Sea Bubble, the mighty
crash of 1825, Britain’s Railway Mania of the 1840s and so on. I think it
needs to be stressed that when speaking of the trade cycle Austrian
economists are referring to a specific economic phenomenon and not to
economic fluctuations in general.
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