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Gerard
Jackson
Nottrampis
posted a comment criticising my attack
on Keynesianism. The following is my response.
It is not meant to be a rebuttal but more of an outline of my views. In the
very near future I shall expand in far greater detail on each of my points.
Now
where to begin:
1.
Demand springs from production, not the other way round, a fact that is
patently clear in a barter economy. Of course, if it were a simple case of
demand bringing fourth production then poverty would never be a problem. Keep
on increasing ‘demand’ and eventually you will make everyone as rich as
Warren Buffett.
2.
Nottrampis is confusing GDP with growth, which is what the vast majority of
economists do. However, genuine growth consists of capital accumulation.
(It’s actually somewhat more complex than this). Throughout the Great
Depression America suffered capital consumption, a fact that was commented on
at the time. (Another term for capital consumption, as you should know, is
“negative growth”). On the other hand, (economists used to love that phrase)
Australia was able to maintain its capital stock, if not actually increase it
somewhat. Therefore, I am genuinely baffled as to how America could have been
experiencing rapid economic growth at the same time as it was consuming its
capital stock. In fact, America was doing so well that on 9 May 1938 Henry Morgenthau
despairingly stated:
We have
tried spending money. We are spending more than we have ever spent before and
it does not work … After eight years of this Administration we have just as
much unemployment as when we started … And an enormous debt to boot!1
In 1938
unemployment stood at 19 per cent in America, about 8.7 per cent in Australia
and 11.4 per cent in Canada. (Although the figures are estimates the
difference between Australia and America is still striking. The same goes for
Canada). When honestly presented we find Roosevelt’s economic record to be a
thoroughly shocking one.
3.
In addition, there was no underemployment in Australian factories during this
period while in Roosevelt’s America widespread underemployment in
manufacturing was the order of the day, as well as capital consumption.
4.
If a balanced budget set the Australian economy back why did it not have any
significant effect on production and unemployment trends? This leads to the
fact that right up to WWII Australia ran surpluses at the same time as
unemployment continued to fall and factory output continuously rose,
excepting the slight downturn of 1937 which was followed by a rapid upturn.
5.
I do not know of any classical economist who promoted deflation. Moreover,
any classical economist would advise a country with an overvalued currency to
allow the currency to adjust downwards. To avoid confusion on this point I
should add that if the country were on a gold standard then the economist
would point out that restoring market exchange rate would require either a
deflation or ‘devaluation’. In fact, Ricardo was very concerned about the
British government’s post-Napoleonic war deflation policy to restore parity
to the pound, saying that “I never should advise a government to restore a
currency, which was depreciated 30 p.c. to par”2.
6.
Australia’s ‘devaluation’ did not fuel the recovery in manufacturing, though
it initially contributed to it. Once again, any classical economist would
have made this point. Anyone who suggests that devaluation is somehow a
refutation of classical economics has not read the classical economists – and
most certainly knows nothing of the history of British economic thought.
7.
‘Devaluations’ are not inflationary. It is absurd to suggest that allowing a
currency to be set at its true exchange rate is inflationary. Having made
that error, Nottrampis argued that “monetary policy could then start to work
as the liquidity trap was no longer with us”. But as I explained elsewhere,
under a factional reserve banking system the money supply always expands once
recovery gets underway. And this is precisely what happened in Britain under
the classical gold standard3.
8.
The liquidity trap is a Keynesian fiction.
9. The
history of the nineteenth century Britain demonstrates that every deflation
was in fact followed by a recovery, though Malthus once thought it would be
otherwise. Furthermore, every competent economist at the time understood what
caused the deflations. I do not know of one who welcomed them.
10.
Real wages did not fall in Australia but money wages did. However, real wages
continued to rise in the US. The idea that real wages (we really should say
wage rates) fell during the Great Depression is a total myth.
11.
It is inconsistent to argue that depression is the result of demand
deficiency while also arguing in favour of policies designed to cut real
wages out of which production is said to spring. The purchasing-power fallacy
of wages had tragic consequences for America and the world.
12.
Classical economists seem to be constantly misrepresented – and always by
people who have never read them. We have, for instance, Professor John
Quiggin stating:
The
standard classical theory suggested that depressions should not occur and, if
they did, would rapidly fix themselves4.
Complete
balderdash. What the classical economists said is that there would be no
“revulsions” so long as the correct proportions between investment and
consumption were maintained. What was under debate was the actual cause of
the “disproportionalities” that marked the trade cycle. Anyone with a passing
knowledge of the currency school would have known this. Quiggin is obviously
another one who has not read the classical economists.
Then on
the other side of the fence we have Dr Steve Kates, lecturer in economists at
RMIT (Royal Melbourne Institute of Technology), who argues that the classical
view of the trade cycle “was essentially a
theory based on the structure of production being out of phase with the
structure of demand”.
Rubbish.
The The real classical theory of the trade cycle was developed by the
currency school and it was a monetary theory. What Kates is preaching is
basically the old Tooke-Mill banking school fallacy. Curiously enough, Kates
never mentions the currency school, not even in his two books, despite its
importance.
13.
Bruning implemented a policy of massive devaluation in the hope of evading
reparations, not because some mysterious classical economist advised him to
do so. In any case, the painful and unnecessary experience of British
restoration of the pound to par after the defeat of Napoleon is proof that
even extremely deep deflations can be made to work.
14.
The German devaluation did not produce Hitler, the myth that Germany was
stabbed in the back, the Weimar hyperinflation and the rising power of the
Communist Party produced the Nazi Party. And it was not the free market that
produced the Great Depression but a gross misunderstanding of the problem
that still haunts us today.
Some
readers are asking why I bother with Nottrampis. Simple, you cannot refute an
argument by running away from it. Nottrampis brings to this site the
arguments that Keynesians use to defend their theories. He should be thanked
for that. I suspect he does so not just because he knows I will answer him
politely and to the best of my ability but also because experience has
probably taught him that the likes of Professor Sinclair Davidson, Steve Kates
and Alan Moran refuse to seriously engage Keynesians, including
post-Keynesians, though they seem to be forever sneering at Keynesianism.
1Franklin
D. Roosevelt Library, Hyde Park, New York, Henry Morgenthau Diary, Microfilm
roll #50, May 9, 1938
2Letters of David Ricardo to Hutches Trower and Others
1811-1823, Oxford at the Clarendon Press, 1899, p 16.
3A
highly detailed description of the normal process of recovery was given by
Wesley C. Mitchell in Business Cycles,
University of California Press, 1913, pp. 452-3. See also Part III in the
same work.
4John
Quiggin, Zombie Economics,
Princeton University Press, 1970. p. 20.
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