by Mario Rizzo
My friend economist Richard Ebeling has discovered two extremely important letters. (Click the link above.)
In 1932 before John Maynard Keynes’s General Theory was written, these letters appeared in The Times of London regarding the appropriate economic policies for Britain to follow during the slump.
There are a number of things that catch the eye. First, the letter signed by J.M. Keynes is also signed by A. C. Pigou whom Keynes was later to consider a prime representative of the out-dated “classical” economics. Second, Pigou and Keynes (as well as the other signatories) caution against both private sector and public sector austerity. This is essentially the same stimulus idea that Keynesians are promoting today.
“Consequently, in present conditions, private economy does not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power and shipping-power, to be turned to a different and more important use, it throws them into idleness.
Moreover, what is true of individuals acting singly is equally true of groups of individuals acting through local authorities. If the citizens of a town wish, to build a swimming-bath or a library, or a museum, they will not, by refraining from doing this, promote a wider national interest. They will be “martyrs by mistake,” and, in their martyrdom, will be injuring others as well as themselves. Through their misdirected good will the mounting wave of unemployment will be lifted still higher.”
The letter signed by F.A. Hayek and Lionel Robbins (and others) is noteworthy because, first, it makes clear that “everyone” is in agreement that deflation is not desirable and should be avoided.
“It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation in itself is desirable.”
Second, Hayek and Robbins stress that the Keynes-Pigou skepticism about private frugality is short-sighted:
“The signatories of the [above] letter…, however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment. Under modern conditions the securities markets are an indispensable part of the mechanism of investment. A rise in the value of old securities is an indispensable preliminary to the flotation of new issues. The existence of a lag between the revival of old securities and the revival elsewhere is not questioned… [Thus] the sale of securities or the withdrawal of…deposits would [not] assist the coming of recovery. “
Third, the letter goes on to reject Keynes-Pigou fiscal stimulus on the grounds that expansion of the public debt would increase the frictions that inhibit recovery.
Finally, Hayek and Robbins conclude:
“If the Government wish to help revival, the right way for them to proceed is, not to revert to their old habits of lavish expenditure, but to abolish those restrictions on trade and the free movement of capital…which are at present impeding even the beginning of recovery. “
It does not take much to see that the issues are basically the same today. The positions of the opposing sides are also the same. As I have said many times before, the great debate is still Keynes versus Hayek. All else is footnote.
UPDATE 07/10/10: See Richard Ebeling’s reply to Paul Krugman here.