Krugman’s No April Fool’s Joke — Unfortunately

by Mario Rizzo

I have been on an enforced vacation by the failure of my previous laptop. Now that I have access to my old files, permit me to begin where I left off at the beginning of April. The topic is of “eternal” significance.

In an April 1st (print edition) opinion article Paul Krugman complained about the revival of so-called Mellonism. This is the idea that liquidation of over-expanded industry and a fall in prices and wages will somehow re-generate economic activity after a recession has begun.As Krugman duly notes, it is unclear that President Herbert Hoover’s Secretary of the Treasury Andrew Mellon had anything to do with this vague idea and even what his putative rationale was. Nevertheless, Krugman believes that Mellonism is still with us, some eighty years later.

But one thing is clear to any informed economist. The issue in pre-Keynesian economics was not whether prices and wages in general should fall or whether a large number of enterprises should fail. Keynes liked to summarize the “classical” position as allowing (encouraging?) the general fall in wages and prices to revive economic activity. While there was a basis for the view in the work of A.C. Pigou and some others, this was not representative of the major tradition. Continue reading