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Monday, January 26, 2009

DID KEYNES RENOUNCE KEYNESIANISM IN WORLD WAR II --- AT ANY RATE, FISCAL STIMULI THAT TARGETED PUBLIC WORKS IN A RECESSION?

Today's Buggy Topic

Look at the subject-heading above.  If you were to believe a quote of Keynes made in 1942 --- Britain by then at war with Nazi Germany since the end of August 1939 and with Japan since Pearl Harbor and the subsequent attack by the Japanese on Singapore, Britain's chief naval base in the Pacific --- the answer seems to be a surprising . . . yes.  Keynes, as you can see if you click here --- the link taking you to the laudable econ-blog Marginal Analysis --- said in those quoted words that public works spending generally take to long to swing into action as an effective stimulus policy to counter a recession.

As It Happens, There's a Wider Debate Here

Yes, a debate prof bug was vaguely aware of . . . having studied, among other things, with some prominent British economists in his university training who had known Keynes well and had written important work on his creation of macroeconomics --- which means focusing on aggregate demand and urging fiscal stimuli (and public-works spending, not tax cuts) to act as a countercyclical antidote to recessions.   (One of these British economists was John Hicks, who invented the IS-LM presentation of Keynesianism that dominated the field for decades and for which, among other distinguished works, he would eventually win a Nobel Prize in economics).

That wider debate?  It started in the late 1930s, by which point Britain had recovered from the Great Depression ahead of the USA --- where the quick New Deal recovery of 1934-1936 was cut short by bad monetary and fiscal policies in 1937 . . . the result of which was a fairly severe one-year recession that raised unemployment from about 9.3% (down from over 20% in 1933) to double figures.  The debate in Britain, which Keynes was in the middle of, was not just whether a future Britain would need effective fiscal and monetary policies to combat recessions and maintain a publicly committed level of minimal unemployment, but how to deal with the likelihood of such policies entailing inflationary pressures in the later stages of a business cycle. 

The Debate Intensified in World War II 

It pitted the staid, largely pre-Keynesian British Treasury officials --- very powerful in Britain (for reasons set out in the buggy comments found at the Marginal Revolution --- against some notable Keynesians who manned a new Economic Section attached to the British War Cabinet.  The head of the Economic Section, a distinguished Austrian-influenced free-market economist, Lionel Robbins, found himself outmaneuvered by the younger Keynesians in his study-group . . . among them a future Nobel Prize winner, James Meade. 

Keynes himself, as was the case, wasn't in that Economic Section.  Made a Baron, he was in the House of Lords, but in constant contact with the Keynesians in that group, as well as with some younger but far less powerful Keynesian civil servants at the Treasury.  Enter a twist in the debate.  Keynes, you see, publicly talked a lot about the dangers of future inflation; he even published a small book about them.  That public record led some future economists to argue that Keynes had renounced his major commitments to public-works spending as the principal tool for fighting recessions . . . a position, it was argued by them, that put him at odds with the Keynesians in the Economic Section.

The Upshot for Our Concerns?

Prof bug, when he found an hour or so of free time late last night, did a google search and found a very good article on the debate and its twist by a British scholar.  It was from this article that the buggy guy was able to show the proper context in which the quote by Keynes had to be placed.  Specifically, as the article showed, Keynes' position was fully in accord with the Keynesian work being done in the Economic Section.  And so the quote doesn't really do what the poster, Tyler Cowen, apparently wanted it to do: show that even Keynes would be skeptical of Obama's plans for large-scale fiscal stimuli.

Click here for the original Professor Cowen post and prof bug's two comments . . . the lengthy important one, drawing extensively on the British article, found --- please note --- on page 2 of the comments.  That requires you to click at the bottom of the 1st page of comments to find prof bug's.  Or, come to that, click here for that second page.