Extract: Skidelsky on Keynes and the Great Depression
by
14th September 2015
When the financial system crashed in 2008, dragging down the real economy with it, governments stepped in everywhere with ‘stimulus packages’ made up of a mixture of bailing out insolvent banks, printing money, providing tax rebates or subsidies for private spending and big increases in loan-financed public spending. This was all according to Keynesian prescription. Even Robert Lucas, high priest of Chicago economics, admitted that ‘we are all Keynesians in the foxhole’. But signs of economic recovery induced by the stimulus rapidly brought about a resumption of normal intellectual service. Most economists and many policy-makers are now calling for a swift withdrawal of the stimulus on the ground that it will bankrupt governments or lead to inflation or both. What this rapid turnabout shows is that the model of the economy that Keynes had tried to blast out of the minds of economists in the early 1930s is still firmly lodged there. It wavers in moments of panic, but quickly reasserts itself. In fact, the current debate about the stimulus is a replay of the debate between Keynes and his critics at the time of the Great Depression.
In 1929, with British unemployment standing at 10% of the insured workforce, Keynes and Hubert Henderson wrote a pamphlet entitled Can Lloyd George Do It? (Keynes, 1981). In this they proposed a big programme of public works, to be financed by loan, the idea being to induce a ‘cumulative wave of prosperity’. The British Treasury attempted to refute the proposal using an argument developed by its only economist Ralph Hawtrey. Hawtrey had claimed that, with a fixed money supply, any loan raised by the government for public works would ‘crowd out’ an equivalent amount of private spending. Employment could be increased only by credit expansion—or what was then called inflation. The prime minister, Stanley Baldwin, was fed the lines ‘we must either take existing money or create new money’.
Keynes riposted: ‘Mr. Baldwin has invented the formidable argument that you must not do anything because it means you will not be able to do anything else’. Yet the Treasury argument of 1929 was restated in 2009, in almost identical terms, by Professor John Cochrane of Chicago University: if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs from the decline of private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. (Cochrane, 2009)
Further: Keynes’ General Theory is available here.
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