When someÂone quesÂtions the effecÂtiveÂness of KeyÂneÂsian ecoÂnomÂics, the obviÂous reply is: RememÂber World War II?
The British econÂoÂmist John MayÂnard Keynes argued that there is a role for govÂernÂment interÂvenÂtion when aggreÂgate demand for goods and serÂvices drops, as it did durÂing the Great DepresÂsion. WithÂout increased pubÂlic spendÂing to make up for decreased priÂvate spendÂing, he said, an econÂoÂmy will slide into a vicious cirÂcle of low demand and low outÂput, ensurÂing a proÂlonged periÂod of high unemÂployÂment. GovÂernÂment thrift at such times will only deepÂen the probÂlem. “The boom, not the slump,” said Keynes, “is the right time for ausÂterÂiÂty.”
In 1939 dark clouds of war were gathÂerÂing over Europe, but Keynes saw a silÂver linÂing: an opporÂtuÂniÂty to prove his theÂoÂry corÂrect. He believed that the masÂsive govÂernÂment-fundÂed war mobiÂlizaÂtion would finalÂly give sufÂfiÂcient stimÂuÂlus to end the Great DepresÂsion. On May 23 of that year Keynes gave his famous BBC radio address, “Will Re-armaÂment Cure UnemÂployÂment?” He said, in part:
It is not an exagÂgerÂaÂtion to say that the end of abnorÂmal unemÂployÂment is in sight. And it isn’t only the unemÂployed who will feel the difÂferÂence. A great numÂber besides will be takÂing home betÂter monÂey each week. And with the demand for effiÂcient labor outÂrunÂning the supÂply, how much more comÂfortÂable and secure everyÂone will feel in his job. The Grand ExperÂiÂment has begun. If it works–if expenÂdiÂture on armaÂments realÂly does cure unemployment–I preÂdict that we shall nevÂer go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two, which will come in useÂful when the day of peace comes.
When the day of peace did come, the Great DepresÂsion was over and EngÂland and AmerÂiÂca were embarked on a long periÂod of risÂing ecoÂnomÂic prosÂperÂiÂty. In these times of recesÂsion and govÂernÂment ausÂterÂiÂty, it may be good to rememÂber someÂthing else Keynes said in his radio address: “If we can cure unemÂployÂment for the wastÂed purÂposÂes of armaÂments, we can cure it for the proÂducÂtive purÂposÂes of peace.”
You can find Keynes’ clasÂsic work, The GenÂerÂal TheÂoÂry of EmployÂment, InterÂest and MonÂey, in our colÂlecÂtion of Free eBooks.
RelatÂed ConÂtent:
What actuÂalÂly hapÂpened durng World War II is that real wage rates (judged by real i.e. “black marÂket” prices) fell — so of course the marÂket cleared and unemÂployÂment vaished (those conÂcriptÂed British solÂdiers were not earnÂing high wage — not if you dodge them by real i.e. “black marÂket” prices).
If govÂernÂment spendÂing increasÂes could cure unemÂployÂment (withÂout real wages comÂming down) then please explain the FAILURE of such a polÂiÂcy in the UnitÂed States in the 1939s — by 1938 vast amounts of monÂey had been spent and mass unemÂployÂment was still there.
There is no need for war to clear a labour marÂket by wage levÂels ajustÂing to new realÂiÂties — IF the govÂernÂment steps out of the way (includÂing no PRO UNION STATUTES) the marÂket will clear.
For examÂple, in 1921 HerÂbert “The ForÂgotÂten ProÂgresÂsive” Hoover, was not PresÂiÂdent.
Hoover after the 1929 credÂit bubÂble bust (the bust of the BenÂjamin Strong New York Fed creÂatÂed bubÂble) preÂventÂed wages adjustÂing to the bust — he was a clasÂsic believÂer in the “demand” falÂlaÂcy.
Hoover also greatÂly increased taxÂes on “the rich” and genÂerÂalÂly was the oppoÂsite of his the image givÂen of him today.
But in 1921 Hoover was not PresÂiÂdent — so when that credÂit bubÂble burst he was not able to threatÂen and demand that wage rates be kept up (and they dureÂly fell) and Hoover was not able to “proÂtect” govÂernÂment spendÂing either — the WarÂren HardÂing AdminÂisÂtraÂtion (with Hoover as a disÂsentÂing memÂber) cut govÂernÂment spendÂing by 25%.
AccordÂing to KeyÂneÂsian ideÂolÂoÂgy allowÂing wages to fall and cutÂting govÂernÂment spendÂing by 25% (not “cutÂting the increase” like a modÂern govÂernÂment — actuÂalÂly CUTTING GOVERNMENT SPENDING) should have destroyed the econÂoÂmy if done in the face of a bust.
In realÂiÂty the econÂoÂmy was in recovÂery withÂin six months — and mass unemÂploymet fell away.
1921 (indeed every othÂer preÂviÂous bust going all the way back to 1819) is imposÂsiÂble to explain by KeyÂneÂsian docÂtrine — in each case after wages fell the econÂoÂmy RECOVERED and unemÂployÂment FELL.
And wages?
AFTER the econÂoÂmy recovÂered wages startÂing to go UP — but based on RISING PRODUCTIVITY (not “demand” ideÂolÂoÂgy).
Stuff to read.
Robert HigÂgs — on World War II.
Hunter Lewis — “Where Keynes Went Wrong”.
And Thomas Woods (“MeltÂdown”) on the true cause of the curÂrent crises.
War does not creÂate wealth. Using scarce resources to make bombs to blow up othÂer scare resources makes peoÂple poorÂer, not richÂer. Of course, enslavÂing young men and shipÂping them overÂsees to fight will lowÂer unemÂployÂment.