Legal Commentary

As part of my one-man assault on PrawfsBlawg's bandwidth, I thought it might be helpful to recall some Great Depression Greatest Hits. All of what follows is drawn from Brad DeLong's "Slouching Towards Utopia?: The Economic History of the Twentieth Century". Whatever you think of Brad's politics, he's a brilliant economist who can bring it when it comes to both macro and economic history.

Contemplating the wreck of his country's economy and his own political career, Herbert Hoover wrote bitterly in retrospect about those in his administration who had advised inaction during the downslide:

The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'.He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'

Sounds kind of familiar. I've seen a bunch of people make these sorts of points lately. Here's DeLong again:

But Hoover had been one of the most enthusiastic proponents of "liquidationism" during the Great Depression. And the unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by the most eminent economists.

DeLong goes on to quote two such economists, Schumpeter and Hayek. Here's a take on Schumpeter:

As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: "inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]... would, in the end, lead to a collapse worse than the one it was called in to remedy." For "recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead"

This doctrine--that in the long run the Great Depression would turn out to have been "good medicine" for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare--drew anguished cries of dissent from those less hindered by their theoretical blinders....

John Maynard Keynes ... tried to bury the liquidationists in ridicule....

Now, I know that good libertarians are supposed to dislike Keynes, and that Hayek and Schumpeter have something akin to patron-saint status. For what it's worth, here's how Milton Friedman viewed the debate:

Later on Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense [i.e., Hayek and Schumpeter] was not taught--but that he understood why at Harvard-where such nonsense was taught-bright young economists might rebel, reject their teachers' macroeconomics, and become followers of Keynes. Friedman thought that Keynesianism was wrong--but not crazy.

Food for thought.