the Treasury View of 1929

What most depresses me, as I read myriad comments on our current financial crisis, is to see that the Treasury View that Keynes fought against in the 1930s is still alive and well. This is the view that public spending displaces private investment, so cannot stimulate the economy. Via Brad DeLong, here is Joan Robinson’s recollection of the 1930s debate, which eerily resembles the debate we are witnessing now.

What was the state of orthodox opinion when the world was struck by the great slump? First of all, there was the famous Treasury View of 1929…. Lloyd George was campaigning for a policy of public works; Keynes with Hubert Henderson produced the pamphlet Can Lloyd George Do It?, which first adumbrated the theory of the multiplier and of the relation of saving to investment. To answer Lloyd George, the Conservative government produced a White Paper in which various ministers stated the case against spending money in their respective departments on housing, schools, roads, etc. The Chancellor of the Exchequer was Churchill; he could not bring himself a second time to defend deflation and sound finance. It was left to the officials to produce the argument for the Treasury. Their case was very simple. It was based on the idea that investment is governed by saving. If the government borrowed £100 million to spend on public works, there would be £100 million less for foreign investment. The surplus of exports would fall by a corresponding amount. There would be a transfer of employment but no change in the total. It is not fair to put much weight on this. The Treasury, after all, was required to say something and this was what they thought of to say. The fact that it appeared to be a respectable argument, however, certainly was a symptom of the state of opinion at that time….

The main orthodox reaction to the slump was the argument that wages were too high. This could be backed up by statistical argument. In those old days, prices used to fall when there was a decline in demand, so that prices were lower relatively to money-wage rates than when employment was higher. In a style of argument nowadays familiar in another context, a correlation was exhibited as a cause. The theory that unemployment could be due only to wages being too high received solid support from the evidence….

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek’s visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone, “Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?”‘ “Yes,” said Hayek, “but,” pointing to his triangles on the board, “it would take a very long mathematical argument to explain why.”

This pitiful state of confusion was the first crisis of economic theory that I referred to…

Joan Robinson, “The Second Crisis of Economic Theory” (Richard T. Ely Lecture), American Economic Review 62:1/2 (March 1972), pp. 1-10.

Cambridge economist Joan Robinson (1903-1983) was a brilliant, original thinker, yet never received a Nobel Prize. Many, if not most, economists believe that the Swedish Royal Academy was biased against her. According to an anonymous biographer in The Concise Encyclopedia of Economics, this bias was not because she was a woman. “Rather, her political views became more left wing as she aged, to the point where she admired Mao Zedong’s China and Kim Il Sung’s North Korea. These extreme views should not have affected her chances of getting an award for her intellectual contributions, but they probably did.”

Joan Robinson previously appeared on TdJ here, as the second entry in the “economics as faith” series.


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