On the Keynesianess of Public Works Spending

Our friend Mario Rizzo has been doing absolutely splendid work uncovering the "real" Keynes and his skepticism about the stimulus value of public works programs.  In preparing for this morning's edition of my senior seminar, which covers the Hoover years, I was struck in re-reading Rothbard's chapters on 1929 and 1930 how much support there was among mainstream economists of the era for public works programs as unemployment relievers.  I bring this up because this was all very much before Keynes wrote The General Theory.  We already know, of course, that Hoover enacted a number of such programs during his time as president.

The pre-GT support for public works gives further lie to the various myths of the Great Depression, especially the one that somehow thinks that Keynesian economics was "behind" the New Deal's massive economic interventionism.  In fact, as many have shown, the New Deal was hardly constructed on the basis of a theory of any sort, and even if FDR had turned to Keynes, he would have found a much more ambiguous message (as Mario points out).  And, given my morning's reading, the idea of using public works to create employment didn't need Keynes anyway:  plenty of big name economists believed it long before FDR became president and there was any such thing as Keynesian economics.

For all the good that economists did in opposing Smoot-Hawley, they did much to undermine it by supporting various public works boondoggles.

Comments

[liberty]

I have Rothbard's GD book, so I suppose I can find it there, but I wonder: what was the economic theory (or empirical evidence) underlying these pre-Keynes economists' belief in public works?

[Greg Ransom]

The public works fad was a result of the lack of demand argument of Foster & Catchings -- Hoover wrote an introduction to one of their books, and the idea of using public works to "solve the problem" was endorsed by Sen. Wagner and FDR -- in the 1920s.

Foster & Catchings were enormously influential -- and a profound factor in the re-thinking of economics in the 1920s. Everyone discussed their argument, and none could identify the fallacy in their work.

How different really is Keynes (1936) from Foster & Catchings?

It's Foster & Catchings for Marshallian economists.

[Josh Hendrickson]

Keynes actually publicly criticized the New Deal in his "Open Letter to President Roosevelt" printed in the New York Times (although in the letter, he does advocate deficit spending). Some highlights:

"In particular, I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large....That is my first reflection--that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery."

"Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices...Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power."

Of course, there is plenty for Austrians to dislike in the letter, but it does highlight the fact that the New Deal was not drawn up on the foundations of Keynesian economics. (Indeed, Larry White's forthcoming book The Clash of Economic Ideas discusses the New Deal at length and presents it as the product of old institutional economics.)

Here is a link to the letter for anyone interested:

http://newdeal.feri.org/misc/keynes2.htm

[Dave Prychitko]

Much was advocated by the economists in the American Economic Association (Ely, Commons, etc) who were Progressive Era spokesmen, institutionalists, interventionists (esp. through regulation) but perhaps even more important they were enamoured by the theories and world-view of the German economists and policy advocates.

[Greg Ransom]

Note also that David Laidler reminds us that the "stick wages" stuff pre-dated Keynes by 60 years and was common to all of the Cambridge economists.

The idea was Marshall's.

But to today's "Keynesians" it's one of the central "innovations"of The General Theory -- and at the core of its refutation of "all that came before".

Ridiculous -- but no more ridiculous than what we have come to expect from the "mainstream" macroeconomists.

[Steve Horwitz]

Greg's description of Keynes as "Foster and Catchings + Marshall" strikes me as quite accurate. It certainly describes the popular (bastardized?) understanding of Keynes of the GT.

I have to say how cool it is to post the main entry before class and then come back from class to these really good comments. I'm going to forward this to the seminar.

[Current]

The idea of sticky prices was present in John Stuart Mill.

Read "Of the Influence of Consumption upon Production", the second essay in "Essays on some unsettled Questions of Political Economy"

On project Gutenburg here
http://www.gutenberg.org/etext/12004

[Josh Hendrickson]

The idea that the only insight of Keynes was to posit the claim that prices and wages are sticky is laughable. If that were true, it would be difficult to understand why anyone bothered to read the text.

In fact, this idea has been thoroughly refuted (as some commenters have alluded to above) by both intellectual followers of Keynes as well as opponents. Leland Yeager's "New Keynesians and Old Monetarists" is excellent on this point as is Davidson's recently published biography of Keynes.

[Current]

Josh you are right in parts.

Keynes' writings contain what we call "sticky wage keynesianism" and "post-keynesianism" (Davidson etc). The sticky wage stuff is quite unoriginal.