The fall economic conversation: Hayek versus Keynes, Romney versus Obama, whither the global business cycle ?

Now that relative calm has  returned to Québec after the provincial election we can focus our attention on the broader economic issues that beset the global economy. The American election although currently focused on foreign policy appears set to return to the  great debate of the 1930s. How do we best prevent a depression from following a sharp business cycle downturn and which school of economic policy and theory that of Keynes or that of Hayek is best suited to accomplishing the task ? Democrat President Barack Obama despite some cautious backtracking in a fiscal conservative direction on the whole is the knight in the field representing Keynes while Republican Mitt  Romney hoists the banner of Hayek and the libertarians. Of course, there are other influences at work but in electoral terms this fall’s election will be a fair test(apart from the campaign lapses of one or the other candidate) of the politics of this debate. The latest data on growth, employment and unemployment, the move to further quantitative easing by the Federal Reserve, this time focused on the mortgage finance market and the on going crisis in European sovereign debt, excessive austerity and excessive unemployment and the attempt by the current head of the ECB to broaden its mandate to include the purchase of sovereign debt all factor into the equation.

On the U.S. employment front the data from the U.S. Bureau of Labour statistics for August showed a slight reduction in the rate down to 8.1 % from 8.3 % in July with the broader measure of unemployment falling to 14.7 % compared to 16.7 % a year ago. The rate among White workers was 7.4 % down from 7.9 % a year ago; among Black and African American workers was 14.1 % versus 16.7 % a year ago; among Asian workers the rate was 5.9 % versus 7.1 % a year ago; among young workers 16 to 19 years of age the rate was 22.8 % unchanged from a year ago. So there was some improvement but not enough to develop a substantial positive trend. Also the participation rate fell probably because of a rise in discouraged workers although the demographics of retirement may be playing a role here as well. Educational attainment also plays an important role in employment. The unemployment rate among those with at least a university or college Bachelor’s degree was 4.1 %; those with some college 6.6 %; those with a high school diploma 8.8% and those with less education than that 12 %.

Just to remind ourselves of how much déjà vu is at work in this campaign have a look at several works which document very well the kinds of views that prevailed during the depression of the thirties about debt, deficits, crowding out, the Treasury orthodoxy regarding the futility of government financed public works , the virtues of of thrift and laissez-faire and the opposition to public spending on behalf of the unemployed. For example, Alan Booth, at the time a lecturer in economic history at the University of Exeter wrote an excellent work on this that was published in 1989 by Harvester Wheatsheaf. Its title British Economic Policy 1931-1949:Was there a Keynesian revolution ?

Booth clearly shows there was a very significant difference between the policies and theoretical thrust of the ideas advanced by Keynes and his followers and the more restrictive version that  Whitehall finally implemented during the war years in the 1940s and in the immediate post war world. But equally important Booth documents in detail the ferocious Treasury opposition to Keynesian stimulus, their insistence upon crowding out, the role of Hayek in seeking to undermine Keynes’ argument, including the fact that he had been  recruited by Lionel Robbins at the LSE  in 1930 to lead a pole of attraction in opposition to Keynes at Cambridge. For the first two thirds of the 1930s Keynes was largely isolated from real influence in government circles. His break with the Liberals over free trade further isolated him from the party system through which he might have had a greater and more rapid influence in shifting policy. (p.31) Hayek, of course, had developed a totally different view from Keynes of the business cycle. See my paper  on the Theory of the Business Cycle in Keynes ,Hayek and Schumpeter read to the Association of Heterodox economics , London U.K., July 7, 2001 posted on this blog site  in Sept. 2011  In his work Hayek stressed over investment as the cause of the crisis and advocated austerity and budget cutting as the solution. In the current circumstances the parallels are uncanny, given the Republican critique of President  Obama’s stimulus and public investment generally and the Republican ‘s tea party wing’s love affair with laissez-faire.

A rereading of Roy Harrod’s biography of Keynes (Roy Harrod, The Life of John Maynard Keynes ,W.W. Norton&Co., 1951) also supplies ample evidence of this where he describes the Treasury view of stimulus leading to crowding out in the 1930s and the bogy of inflation already in the 1920s when Keynes was working out his opposition to returning to the gold standard in the Tract on monetary reform. Thrift was considered a virtue as opposed to the vice it had become during the depression.(pp.405-409)

My own work on deficit hysteria also documents the widespread antipathy to deficit spending  that existed in Canadian policy circles during the 1930s.(see for example, Harold Chorney,  The Deficit and Debt Management:An Alternative to Monetarism, The Canadian Centre for Policy Alternatives , 1989.)

History does tend to repeat itself, at least, in part, it appears.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in austerity, business cycles, deficit hysteria, deficits and debt, European debt crisis, Federal Reserve, fiscal policy, free trade and globalization, full employment, Hayek, treasury view, U.K. economy, U.S., Uncategorized, unemployment. Bookmark the permalink.

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