Wednesday, May 8, 2013

A side note/question on the Ferguson uproar

This post does not address the main issues involved in l'affaire Ferguson (latest edition) because I think those issues are adequately dealt with elsewhere in parts of the blogosphere (CT, LGM, DeLong, etc. etc.) that have far, far larger audiences than this blog does.

I would like to raise one side point, however. To wit: when I was growing up, I was taught (or imbibed through osmosis, or both) that the clearest lesson of the Great Depression was that  governments' failure to spend in response to the crisis was the height of folly. The economic orthodoxy of the time opposed deficit spending, but that orthodoxy was proved wrong; pump-priming in a depression was obviously the correct policy. That's what I gathered from everything I read, in school and out of school, about the period, and I assumed, until fairly recently, that it was pretty much universally acknowledged to be true. Even as late as the 1990s, it was -- or such was my impression -- fairly unusual to find an academic economist (let alone historian) contending that governments were actually right and sensible in their failure to spend more vigorously at the onset of the Great Depression.

In recent years, however, this consensus -- or what I took to be a consensus -- has fallen apart to such an extent that Ferguson, in his 'open letter' in The Harvard Crimson, can write this:
Throughout my career as a historian, I have regularly written and spoken about Keynes, who had one of the most brilliant minds of the twentieth century. That, of course, is the most important thing about him. You may disagree with his argument that, in a depressed economy, the government should borrow and spend money to stimulate aggregate demand. But you cannot ignore it. (emphasis added)
I take "you may disagree" to mean, in effect, "it is reasonable to disagree."  In other words, Ferguson is saying that reasonable people disagree about whether governments should seek to stimulate aggregate demand in a depression by spending. Would any historian or economist of any reputation, including conservative ones I mean, have written this passage 25 or 30 years ago? If the answer is no, then this is a small sign of how much the prevailing intellectual and political winds have shifted in recent years. Of course, the entire debate about 'austerity' and the policies adopted by various European governments are a much louder signal of the same thing, but I nonetheless find this passage worth remarking.
Added later: Just in time for the WW1 discussion: A review of The Sleepwalkers (Clark) and July 1914 (McMeekin) in the current NYTBkRev. (Haven't read the review yet.)


Anonymous said...

My vague impression from a daily habit of skimming Krugman's blog is that 25 or 30 years ago, the new orthodoxy was indeed that Keynes was wrong and that monetary policy cured all ills.

LFC said...

So if that was a new orthodoxy 25-30 yrs ago, that wd suggest my ruminations in the post are not too far off.

Btw, I have a couple of WW1 biblio items to pass on, result of a brief sojourn in the lib. today.
Will do it in a comment here at some pt tomorrow.

Anonymous said...

Thanks, will check back on that.

And unless I've overlooked an existing one, "My Favorite IR Books" might conceivably be as fun for you to write as for us to read. Either in your specialty or just favs.

-TBA (getting OpenID error)

hank_F_M said...


You commented.

Would any historian or economist of any reputation, including conservative ones I mean, have written this passage 25 or 30 years ago? If the answer is no,

Of course your right. It was about then that some of a new generation of economists started asking a couple of questions.

1.) Why was the Great Recession longer than would be expected from the norm.

2.) The business cycle goes up and down. It was certain to go up sooner or later (a small confort to those unemployed.) Did the New Deal speed, slow, or have no effect?

They went back to original data and reconstructed events and a came up with some rather unexpected conclusions. This is rather more radical than a simple supply side economics which at best really called for remembering the law of supply and demand is about both supply and demand balance is necessary even with Keynes..

In the early 2000's this started to reach a non-professional audience.

It seems there are two competing consensus' among serious professional economists, a debate who's resolution is beyond my knowledge of economics.

For your reading enjoyment an article by the UCLA economists who were among the first to publish for a non-professional audience.

FDR's Policies Prolonged Depression

LFC said...

Thanks - I'd never heard of Cole and Ohanian, I don't think.

Based on the summary in the linked piece, one of their main targets of criticism is the NIRA's exemption of industry from anti-trust prosecutions if businesses agreed to collective-bargaining agreements that raised wages.

That particular point has nothing directly to do with govt spending to boost aggregate demand. The New Deal programs spent money on infrastructure -- e.g. through the WPA and Tenn Valley Authority, iirc; whether these programs contributed to alleviating the Depression or not is a question that is not answered by criticizing the antitrust exemption and the labor provisions of the NIRA b/c, to repeat, those provisions have nothing directly to do w govt spending. Cole & Ohanion criticize policies that they say artificially inflated prices and wages, thereby (allegedly) having bad effects on demand and employment, but acc. to the press release/summary you linked, they don't address the issue of increasing aggregate demand through govt stimulus spending, which was the focus of my post.

However, in order to get the full flavor of the Cole/Ohanion position, I suppose I wd have to read their academic papers. But I am skeptical of their assertion that the natural workings of the bus. cycle wd have ended the Depression sooner if the govt had just done nothing.
Prices could have been as low as all get-out and w c. 30% (or whatever) unemployment, many people could not have afforded to buy even v. inexpensive goods. Low prices don't ensure a recovery of demand unless people have some disposable income to begin with. (Of course I am not an economist, so... )

LFC said...

from the summary:

"Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data."

This assumes that prices and wages are wholly determined by productivity increases, or wd have been absent certain govt interventions. I have never fully understood the marginal-productivity theory of wage determination, and to the extent I do understand it I am skeptical of it. I'll leave it at that.

LFC said...

I've never done a "favorite IR books" -- will think about it -- though a long time ago I did a "top IR books of the last decade" kind of post -- that's a bit different though.


WW1 items -- not recommending exactly, just mentioning. (I had intended to check out the edited vol. An Improbable War? mentioned by 'the anon' at CT, but left my lib card behind so didn't check out anything.)

John W. Langdon, July 1914: The Long Debate, 1918-1990 (Berg, 1991). Appears to be a good, thoughtful review of the historiographical debates, but only up to 1990 obviously.

Holger Herwig (ed.), The Outbreak of World War One, Probs. in Eur. Civilization series (Houghton Mifflin, 6th ed., 1997). A short pb, obviously designed for students, w excerpts from a bunch of diff. authors. I didn't check on whether there is a more recent edition. (Frankly I don't know how useful this wd be to anyone other than undergrads just being introduced to the subject, but at least it wd give a sense of the range of opinion pre and post-Fischer, through the mid-90s. Includes an excerpt from a '73 bk by Rohl, whom 'the anon' was on about at CT).

LFC said...

Here's link to my "notable IR bks of the past decade post" from dec 09:

haven't re-read it closely and might do it differently if doing it today

LFC said...

activated link