I was in my first year of graduate economics in 1965 when the pillar of conservative economics, Milton Friedman, famously said, “We are all Keynesians now.”
Well, that settles that, I mistakenly thought.
Turns out, the news was inconvenient for conservatives because Keynesian economics justifies government intervention when the economy goes to hell in a handbasket.
Conservatives don’t like government intervention unless it is to subsidize the oil industry. So they have resurrected an older economic theory that says problems solve themselves – the Austrian School of Economics. Our own congressman, Rep. John Campbell, espouses it, along with presidential candidate Ron Paul and CNBC commentator Rick Santelli, who coined the term “Tea Party.” Lots of so-called supply-siders embrace it, too.
The Austrian School is based on the pseudo-science of praxeology. If that doesn’t scare you or put you to sleep, you’ve probably forgotten those 8 a.m. Saturday classes you had as a freshman. Essentially, praxeology argues that individuals behave rationally and everything will be OK if you just get out of their way.
Check your own family to test this theory. I have, and, while I love my wife and children dearly, they have shown over the years that there are flaws in the Austrian theory of rational behavior.
A second problem for conservatives is that facts get in the way of their theory. That’s what happened in 1929, when the Depression hit. The Austrian School promised that if we did nothing, a gale of creative destruction would automatically fix the economy (see Austrian economist Joseph Schumpeter for details).
That’s pretty much what President Hoover did back then – let markets run their course. Well, we certainly got the destruction the Austrians promised – but facts are facts, and the fact is the economy didn’t fix itself.
Keynes then came along with a new theory that actually explained what the Austrian School could not. Most economists have been fact-based number crunchers ever since.
In rebuttal, the Austrian School argues we can ignore the facts. The real world, they say, is too complex to accurately measure facts. Now that conservatives can ignore the facts, it is very difficult to argue with them. We liberals have the same problem with conservatives when we want to bring up evolution or climate change.
Me, I don’t believe every economic problem solves itself, and I’m old enough to remember Sgt. Joe Friday on “Dragnet”: “Just the facts, ma’am.”
There’s nothing pseudo about Austrian economy. And if really want fact about Hoover and the depression. I recommend you read Murray Rothbard’s, American Depression.
Yep, Hoover was so much of a free market guy that even Roosevelt campaigned against his spendthrift ways.
– he began a series of conferences with big business and labor leaders, insisting that business adopts “voluntary” measures that the government desired, with the implicit threat that if business did not “volunteer” properly, compulsory controls would soon follow
– promised the farm bloc to support farm cooperatives and prices and established the Federal Farm Board, which was to make all-purpose loans to farm cooperatives at low interest rates and establish “stabilization corporations” to control farm surpluses and bolster farm prices
– passed the Smoot–Hawley Tariff, despite objections of many economists and industrial leaders. Many other countries have retaliated with their own tariffs and foreign trade declined significantly.
– signed the Davis-Bacon Act, mandating that prevailing (union) wages be paid by the Federal Government for public works projects
– from a modest surplus in 1930, the Federal government ran up a huge $2.2 billion deficit in 1931
– the Revenue Act of 1932 was one of the greatest increases in taxation ever enacted in the United States in peacetime. Many wartime excise taxes were revived, sales taxes were imposed on gasoline, tires, autos, electric energy, malt, toiletries, furs, jewelry, and other articles; admission and stock transfer taxes were increased; new taxes were levied on bank checks, bond transfers, telephone, telegraph, and radio messages; and the personal income tax was raised drastically. Furthermore, the corporate income tax was increased from 12 percent to 13: percent, and an exemption for small corporations eliminated; the estate tax was doubled, and the exemption floor halved; and the gift tax, which had been eliminated, was restored, and graduated up to 33⅓ percent. The postal rates were raised as well.
– Hoover eventually admitted that his public works program, that grew up to $333 million in 1932, failed.
– signed the Norris-Laguardia Act, which banned “yellow-dog” contracts, removed federal courts’ authority to issue injunctions against labor disputes, and provided greater ease for workers to organize; a landmark victory for organized labor
– passed the Emergency Relief and Construction Act — the nation’s first Federal relief legislation
– continuing with inflation, he passed the Glass–Steagall Act, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper