Great Political and Economic Thinkers:
Theory and Reality
Lectures by Robert M. Coen
Emeritus Professor of Economics
Northwestern University
November 11 and 18, 2014
Web site: faculty.wcas.northwestern.edu/~rcoen
Email: rcoen@northwestern.edu
November 11
20th Century Revolution in Economic Thinking:
John Maynard Keynes
November 18
Counterrevolution to Keynes
and Critiques of Activist Economic Policies:
Hayek, Friedman, Lucas, and Others
20th Century Revolution in Economic Thinking: John Maynard Keynes
Story inside:
“Man of the Moment: Why
John Maynard Keynes is
just the economist we need
to get the world’s economy
humming again”
by Peter Coy
Bloomberg Businessweek cover, Nov. 3, 2014
Major Questions to be Addressed
What was the state of economic thought at the turn of the 20th century?
What made economics ripe for a revolution?
What were Keynes’s revolutionary ideas?
Why was Keynes such an effective revolutionary leader?
What led to the decline of Keynesianism beginning in the 1970’s?
Why is Keynes back on the cover of Bloomberg Businessweek?
Major Questions to be Addressed
What was the state of economic thought at the turn of the 20th century?
Frederick S. Deibler, 1876-1961
NU Professor of Economics and
Commerce, 1914-42
Chair of Economics, 1916-42
Secretary-Treasurer of the American
Economic Association, 1925-36
Endowed Deibler Awards in
Economics
Principles of Economics (1929, 2nd
ed. 1936))
Contributor to Society Today (1929),
“The Future of Our Economic System”
Society Today (1929)
Baker Brownell, ed.
Vol. 5 of Man and His World:
Northwestern University Essays in Contemporary Thought
Brownell taught editorial writing, philosophy and contemporary thought
Society Today series drew on his innovative course on thought
Other contributors to Vol. 5:
Edwin E Slosson, chemist, science writer
“The Energy of the New World”
Walter Dill Scott, psychologist, NU President 1920-39
“The New Energies and the New Man”
Willard E. Hotchkiss, NU Commerce Dean 1908-17, then Stanford 1925-32
“Business in the New Era”
Stuart Chase, economist, social theorist and reformer
“Consumers in the Modern World”
Economics at NU, circa 1925
Basic Texts: Irving Fisher, Principles of Economics
T. N. Carver, Distribution of Wealth
Henry George, Progress and Poverty
Largely limited to “Microeconomics” – analysis of value, production, distribution
No courses comparable to today’s “Macroeconomics” - business cycles
Macroeconomics doesn’t arrive until 1952 (Robert Eisner)
Key macroeconomic concepts, e.g., GDP and National Income, not yet devised
Money, banking, and finance only macro-related course
No mention of Karl Marx in Deibler’s text
Passing reference to Keynes on economics as a science
Most cited are Alfred Marshall and Irving Fisher
Economic Orthodoxy circa 1929
Basic Tenets
Inflation caused by increase in money supply
Governments tempted to print too much money
Fluctuations in production unavoidable, desirable
Persistent unemployment due to excessive wages
Major Policy Implications
Back money with gold to maintain confidence in currency
Require government to balance budget
Eliminate temptation to print money
Allow business cycles to run their course
Don’t interfere with creative destruction of free market
Keep wages and prices flexible; promote competition
The “Classical Quartet” of Economics
Adam Smith, 1723-1790
Thomas Malthus, 1766-1834
David Ricardo, 1772-1823
John Stuart Mill, 1806-1873
The “Neoclassical Duo” of Economics
Alfred Marshall, 1842-1924
Irving Fisher, 1867-1947
Irving Fisher, 1867-1947
•
•
•
•
•
•
•
•
•
Genius - America’s greatest
economist?
Trained in physics and math, but
“renaissance man”
Yale PhD (math) – pure economics
Taught at Yale entire life
President of AEA, 1918
Co-founder of Econometric Society,
1930, first president
Congenital reformer, inveterate
crusader
Inventor
Non-economic activism
–
–
–
–
–
•
Prohibition
Vegetarianism
Fresh air and exercise
Eugenics
Peace, League of Nations
Reputation ruined by 1929 crash
Supply and Demand Diagram
What Made Economics Ripe for a Revolution Post WWI?
Instability of free-market capitalism
US Growth Rate, Real GDP per Capita, 1791-1929
(percent)
15
10
Percent
5
0
-5
-10
-15
00
10
20
30
40
50
60
Year
Source: S.H. Williamson, MeasuringWorth, 2014
70
80
90
00
10
20
US Inflation Rate, 1791-1929
(percent)
30
Percent
20
10
0
-10
-20
00
10
20
30
40
50
60
Year
Source: S.H. Williamson, MeasuringWorth, 2014
70
80
90
00
10
20
US Growth Rate, Real GDP per Capita, 1791-2013
(percent)
15
10
Percent
5
0
-5
-10
-15
1800
1825
1850
1875
1900
Year
Source: S.H. Williamson, MeasuringWorth, 2014
1925
1950
1975
2000
US Inflation Rate, 1791-2013
(percent)
30
Percent
20
10
0
-10
-20
1800
1825
1850
1875
1900
Year
Source: S.H. Williamson, MeasuringWorth, 2014
1925
1950
1975
2000
US Growth and Inflation
Pre-Keynes and Post-Keynes
Growth Rate of Real GDP per Capita (percent)
Pre-Keynes
Min
1791-1929
Average
StDev
Max
1.5
3.9
11.6 (1916)
-13.4 (1908)
Post-Keynes
1947-2013
1.9
2.2
6.7 (1950)
-3.7 (2009)
Inflation Rate (percent)
Pre-Keynes
Min
1791-1929
Average
StDev
Max
0.6
6.1
21.0 (1917)
-16.3 (1802)
Post-Keynes
1947-2013
3.3
2.3
10.4 (1947)
-0.2 (1953)
Post-Keynes: Higher, more stable growth; higher, more stable inflation
The Great Depression
1929 1932
Real GDP
(2005 prices)
%change
977.0
725.8
-25.7
34.1
25.1
-26.4
2.9
22.9
+20.9
Price level
(1929=100)
100.0
76.7
-23.3
Consumer spending
736.6
614.7
-16.5
Investment spending
101.7
12.9
-87.3
38.0
20.4
-46.3
Employment (private)
Unemployment rate
Exports
What Made Economics Ripe for a Revolution Post WWI?
Instability of free-market capitalism
Stagnation of the UK
Financial, trade, and unemployment problems in Europe
UK and US Real GDP, 1870-1939
Indexes, 1870=100
320
280
Index
240
200
160
120
80
70
75
80
85
90
95
00
05
Year
Source: S.H. Williamson, MeasuringWorth, 2014.
10
15
20
25
UK
30
35
US
US and UK Prices Levels, 1870-1939
Indexes, 1870=100
300
250
Index
200
150
100
50
70
75
80
85
90
95
00
05
Year
Source: S.H. Williamson, MeasuringWorth, 2014.
10
15
20
25
30
UK
35
US
Real GDP per Capita of World Leader
(1990 dollars; leader in red)
1820
1870
1913
1950
Netherlands
1,838
2,757
4,049
5,996
UK
1,706
3,190
4,921
6,939
US
1,257
2,445
5,301
9,561
1.8
8.9
18.9
27.3
US share of
world GDP
Source: Angus Maddison, Contours of the World Economy, 2-2030AD
What Made Economics Ripe for a Revolution Post WWI?
Instability of free-market capitalism
Stagnation of the UK
Financial, trade, and unemployment problems in Europe
Conventional policy prescriptions not working
Maintain the gold standard
Government should balance budget
Allow business cycles to run their course
Keep wages and prices flexible; promote
competition
New proposals, e.g., public works spending, lacked
theoretical justification
Marxian Revolution posing challenge to capitalism
Life of John Maynard Keynes
1883: Born to John Neville Keynes, economics lecturer at Cambridge, and Florence Ada
Keynes, one of the first female Cambridge graduates (Newnham)
1897-1902: Studied at Eton, excelling in math, but also writing and debate
1902-1905: Undergrad at King’s College, Cambridge, first class in math; read Marshall’s
Principles and studied with Marshall
1906: Takes Civil Service exams, tops in political science, logic, philosophy, essay;
worst scores in math and econ!
1906-1907: Civil Service position, London India Office. Revenue, Statistics, and
Commerce Dept; studied probability theory on the side
1908-1909: Completed dissertation on probability theory at Cambridge, elected fellow of
King’s Colllege, lectured on money, credit and prices
1911: Appointed editor of the Economics Journal
Life of John Maynard Keynes
1913: Published Indian Currency and Finance, joins Royal Commission on Indian
Finance and Currency
1915: Joined Treasury to advise Lloyd George on war finance, moved up quickly and
designed system of war loans
1917-18: Took authority at Treasury for inter-allied economic effort, made estimates of
German capacity for reparations payments; left Treasury to return to Cambridge to
lecture and write
1919: Published The Economic Consequences of the Peace, a sharp indictment of the
excessive reparations imposed on Germany by the Versailles Treaty
1921: Published Treatise on Probability
1922: Published A Revision of the Treaty, again arguing for reduction in German
reparations; published lengthy supplements on Europe’s economies in the Manchester
Guardian arguing for currency devaluations
1923: Published A Tract on Monetary Reform, calling for end to the Gold Standard
The Gold Standard
Quantity theory of money: MV = PY
V determined by financial practices
Y determined by resources and technology
Price level rises when money supply increases
Each nation pledges to redeem its currency for gold at a fixed price
Issue of currency tied to government holdings of gold
World money supply rises with new gold discoveries
If imports exceed exports, nation loses gold
→ money supply contracts, price level falls
→ stimulates exports, reduces imports
→ trade automatically rebalanced
The Gold Standard
Quantity theory of money: MV = PY
V determined by financial practices
Y determined by resources and technology
Price level rises when money supply increases
Each nation pledges to redeem its currency for gold at a fixed price
Issue of currency tied to government holdings of gold
World money supply rises with new gold discoveries
If imports exceed exports, nation loses gold
→ money supply contracts, price level falls
→ stimulates exports, reduces imports
→ trade automatically rebalanced
Life of John Maynard Keynes
1924: Published Does Unemployment Need a Drastic Remedy? in the Nation,
proposing large government outlays on housing, roads, and electric power to stimulate
the economy
1924: Delivered Ball Foundation Lecture at Cambridge, titled it The End of Laissez-Faire
1925: Married Lydia Lopokova, Russian ballerina
1929: Joined government’s Macmillan Committee of Enquiry into Finance and Industry
1930: Joined the Economic Advisory Council to evaluate economic policy; wrote in the
Nation, “We are now in the depths of a very severe international slump which will take its
place in history amongst the most acute ever experienced. It will require not merely
passive movements of bank rates to lift us out of a depression of this order, but a very
active and determined policy.”
1930: Published A Treatise on Money, arguing that the correct action in economic
depression is to encourage spending and discourage saving, contrary to conventional
wisdom
Life of John Maynard Keynes
1931: Visited the US Federal Reserve and President Hoover
1931: Finally won long-running argument with British Government to abandon Gold
Standard and devalue sterling
1934: Published an open letter to President Roosevelt in NY Times warning (1) to focus
on economic recovery not economic reform (set aside NRA) and (2) avoid “crackedbrained” advice about how to stimulate recovery.
1936: Published The General Theory of Employment, Interest, and Money
1939: Turned down offer to be member of Parliament for Cambridge University to remain
free to take his own stances on issues
1940: Published How to Pay for the War, proposing low interest rates, compulsory
savings (deferred pay) to prevent inflation (like that in WWI); moved to the Treasury as
an adviser
Life of John Maynard Keynes
1941: Made first of several important visits to America to negotiate on Britain’s behalf,
including Lend-Lease
1942-44: Made proposals and engaged in discussions about what later become the IMF,
World Bank, and Breton Woods international currency arrangements
1942: Awarded peerage, taking seat in the House of Lords
1943: Met Harry Dexter White, Chief International Economist at the U.S. Treasury, with
whom he crossed swords on plans for post-war economic arrangements
1944: Central figure at the Bretton Woods conference
1946: NYTimes obituary: “To find an economist of comparable influence, one would
have to go back to Adam Smith.”
Harry Dexter White and Keynes at Bretton Woods, 1944
END