The New Economics and American Economists in the 1930s Reconsidered

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The New Economics and American Economists in the 1930s Reconsidered

Introduction

J. Ronnie Davis [1968 1971] has argued that many American economists were in favor of countercyclical fiscal policy in the 1930s before the publication of Keynes' General Theory, and that they based their policy advice on a clear understanding of the income-expenditure theory that later came to be called Keynesian. Gordon Tullock, in his foreword to Davis' prize-winning book [1971, x], claimed that Davis "ably demonstrates that the point of view held by almost all leading economists in the United States during the period of the Great Depression was a view which most modern laymen would denominate 'Keynesian'. Indeed, after reading his book, one wonders where Presidents Hoover and Roosevelt were getting their economic advice."

This thesis collapses when confronted with the writings of American economists in the 1930s, on the appropriate fiscal response to the Depression. The Chicago economists, shown by Davis to have favored balancing the budget only over tha length of the business cycle, were not representative of the profession as a whole. Economists at Brookings, Columbia, Harvard, Princeton, and Yale, with some exceptions, preferred balanced budgets and the gold standard to demand stimulus.

Further, it should be kept in mind that support for public works spending to increase employment does not imply understanding of the multiplier analysis. Many of those who called for increased public works in the 1930s based their arguments on the direct employment alone, neglecting the secondary employment created when the workers on the public works projects spent their wages. When secondary employment from public works was mentioned by American economists in the early 1930s, their analysis rarely went beyond the primitive multiplier analysis presented by Keynes and Hubert Henderson in 1929, which did not explain how the multiplier could be calculated or demonstrate that its value would be finite.

Two American economists did show a clear understanding of the income-expenditure theory, John Maurice Clark of Columbia and Paul Douglas of Chicago, but they explicitly derived their analysis from the writings of Richard Kahn and John Maynard Keynes.

Stabilization of Employment: 1933

If most of the leading American economists had grasped the income-expenditure theory before the publication of Keynes [1936], some trace of it should have appeared in Stabilization of Employment [Roos, 1933]. This is a volume of seventeen invited papers that was given to a joint session of the Econometric Society and American Association for the Advancement of Science, in Atlantic City in December 1932. Since the session was organized by Irving Fisher of Yale, as president of the Econometric society, and Harold Hotelling of Columbia, as secretary of Section K of the American Association, and the proceedings edited by Charles F. Roos, author of the first two Cowles monographs, the volume could draw on the greatest technical sophistication available in the American economics profession.,

Despite, this, the only paper in the volume that could take a place in the later macroeconomic literature was one by Fisher in which he presented charts but no correlations to support his contention that employment depended on a distributed lag of past changes in the price level, since unexpired contracts would cause business expenses to adjust more slowly to price changes than business receipts would.

Three papers on public works by Leo Wolman of Columbia, W. N. Loucks of the University of Pennsylvania, and J. L. Harrington of the R. F. C. urged that public works, that would be undertaken anyway, should be scheduled for periods of

cyclical unemployment, but would not sanction any expansion of public works beyond that. Another contributor, Everett Du Pay, approvingly summed up these three papers and agreed that [Roos, 1933, P. …