Thursday, November 27, 2008

The Great Slump of 1930

Listen to Nobel Prize winner Paul Krugman enthuse about the essay written by John Maynard Keynes:

This essay comes from Keynes pre-General Theory; he was groping toward an integrated framework for thinking about depressed economies, and not quite there yet. But its observations on the crisis at hand remain stunningly insightful, and fit current events all too well.

This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.

Now read the full essay, The Great Slump of 1930.


Albert Singh said...

Two aspects of this essay by Keynes seem highly relevant today.

I. Keynes stressed the threat which the slump posed to ‘the social stability of every country alike’.

‘… a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations … would be a fertile soil for agitation, seditions, and revolution. It is so already in many quarters of the world.’

The only place where I know this aspect of this essay of Keynes and his other writings has been discussed is in Donald Markwell’s book called ‘Economic Paths to War and Peace - John Maynard Keynes and International Relations’ (around pages 172-173).

II. Keynes ended by stressing the necessity of the monetary authorities of the big economic powers acting together.

‘…nor can any one central bank do enough acting in isolation. … the most effectibe remedy would be that the central banks of these three great creditor nations [the United States, France, and England] should join together in a bold scheme to restore confidence to the international long-term loan market; which would serve to revive enterprise and activity everywhere, and to restore prices and profits, so that in due course the wheels of the world’s commerce would go round again.’

As Markwell’s book also shows, this necessity of international economic action is one of the key lessons from Keynes’s thinking, at least from the aftermath of the First World War on.

Does anybody else think these two points from Keynes are of the utmost importance to our current global meltdown?

walla said...

etheorist said...

Bear in mind that the events today have occured post-General Theory where everywhere we are all Keynesians. Governments are now stimulating their economies at the drop of the hat - eh, the market - and in the world of the IMF and the World Bank - which are products of Keynesian thoughts. I therefore conclude that Keynes is today irrelevant.

The world today is in a greater distress mode - where the issuer of the international reserve has greatly abused its seignorage. The US financial markets have collapsed not because of tight monetary policy - but under excessively easy money conditions. The US banks have proven themselves to be highly irresponsible in their lending policies.

We are now in a new post-Keynesian paradigm - and we must proceed to think anew.

de minimis said...


Is the proposition, then, that since every government accepts intervention to attempt to restore equilibrium a'la Keynes, the effects negate each other? I suspect this question may not be quite right.

What are the key parameters that a next Keynes should have in mind?