WEBVTT NOTE 'America’s Great Depression' 50th Anniversary 1 00:00:00.000 --> 00:00:07.080 I'm really going to try to keep within my time schedule here, and if you indulge me, I'll read my remarks. 2 00:00:07.080 --> 00:00:10.360 I just wanted to start with a little story, though. 3 00:00:10.360 --> 00:00:21.560 When I received Roger's paper, he noted that it was six years after the publication of America's Great Depression that he purchased the book. 4 00:00:21.560 --> 00:00:29.240 Well, I vividly recall taking the subway to Manhattan in about 1965 and purchasing both 5 00:00:29.240 --> 00:00:34.200 Man Economy and State and America's Great Depression at the Nathaniel Brandon Institute. 6 00:00:34.200 --> 00:00:42.720 I don't know if any of you remember this, I find that now both amusing and somewhat disconcerting 7 00:00:42.720 --> 00:00:50.000 because shortly thereafter you can no longer buy Murray's books at Nathaniel Brandon 8 00:00:50.000 --> 00:00:55.360 Institute, because he had by that time been purged from the inner circle. So they no longer 9 00:00:55.360 --> 00:01:00.640 carried any of his stuff. But Roger's remark really does remind me of how long ago that 10 00:01:00.640 --> 00:01:09.880 was. And so it seems fitting on the 50th anniversary of the publication of that book that we take 11 00:01:09.880 --> 00:01:15.300 acknowledgement of the resonance and the great influence of this book and it's had to this 12 00:01:15.300 --> 00:01:45.300 I would like to suggest that it was a kind of a book of the times in one sense, but it was also a very interesting book in terms of promoting further research, and in preparation for this panel, I set myself the task of trying to look into chapters two and three of America's Great Depression, those chapters in which Rothbard responds to Keynesian criticisms 13 00:01:45.300 --> 00:01:47.660 of the Austrian Business Cycle Theory. 14 00:01:47.660 --> 00:01:52.660 And also in chapter three, it takes on an Austrian critique 15 00:01:52.660 --> 00:01:55.320 of alternative depression theories. 16 00:01:55.320 --> 00:01:58.000 Now, most of these theories, I think, 17 00:01:58.000 --> 00:02:01.840 can be grouped around a kind of a rubric 18 00:02:01.840 --> 00:02:05.680 that I will identify as mainstream Keynesianism. 19 00:02:05.680 --> 00:02:08.320 What's interesting, I think, for me in that 20 00:02:08.320 --> 00:02:11.360 is that when Rothbard was writing the book, 21 00:02:11.360 --> 00:02:15.800 Mainstream Keynesism was very much a target of his work 22 00:02:15.800 --> 00:02:20.800 and it hasn't much changed really that much since then. 23 00:02:20.960 --> 00:02:23.540 So that's why I say it's a book of the past 24 00:02:23.540 --> 00:02:25.380 but it has great relevance still today. 25 00:02:25.380 --> 00:02:28.040 So what I would like to do is offer a couple 26 00:02:28.040 --> 00:02:31.240 of observations on these chapters for the purpose 27 00:02:31.240 --> 00:02:34.220 of inducing some themes that establish the relevance 28 00:02:34.220 --> 00:02:36.960 of America's Great Depression for today's world. 29 00:02:36.960 --> 00:02:39.360 The upshot of these remarks is quite simple, 30 00:02:39.360 --> 00:02:44.760 that America's Great Depression is not only relevant back then, but still highly relevant 31 00:02:44.760 --> 00:02:50.000 for contemporary work. And that relevance may be more urgently needed now than even 32 00:02:50.000 --> 00:02:55.120 when he wrote the book in 1963. Yet, I think there's an important difference 33 00:02:55.120 --> 00:03:01.640 between then and now as well. During the 1960s, Keynesianism was ascendant. It was coming 34 00:03:01.640 --> 00:03:08.960 to dominate and probably had already dominated academia. And the difference now, I think, 35 00:03:08.960 --> 00:03:16.920 is that while there is a much greater degree of diversity in monetary economics now, the 36 00:03:16.920 --> 00:03:22.480 fact is that from a policy standpoint, it has really just co-opted the entire argument 37 00:03:22.480 --> 00:03:29.500 pretty much. And so that we now live in a time when, while the intellectual foundations 38 00:03:29.500 --> 00:03:34.780 of Keynesianism has come under some critique, the policy application of those very same 39 00:03:34.780 --> 00:03:41.300 and doctrines that Rothbard was complaining about still are very much with us and I think 40 00:03:41.300 --> 00:03:44.300 with us in spades. 41 00:03:44.300 --> 00:03:51.660 So it's in that sense that I think America's Great Depression really does matter for the 42 00:03:51.660 --> 00:03:53.020 here and now. 43 00:03:53.020 --> 00:04:00.860 And I think changing some of these trajectories both in terms of critiquing Keynesian theories, 44 00:04:00.860 --> 00:04:05.980 which I take to be the substance of those two chapters as well as stating the positive 45 00:04:05.980 --> 00:04:12.620 alternatives i.e. Austrian business cycle theory are really very much on this table 46 00:04:12.620 --> 00:04:19.500 right now and make America's Great Depression a very valuable text. 47 00:04:19.500 --> 00:04:25.340 With that said, I want to just take two examples out of these two chapters and I'd like to 48 00:04:25.340 --> 00:04:42.340 I'd like to talk about Rothbard's criticism of the liquidity trap, which was very dominant back then, and also I would like to talk about Rothbard's implied attack on the use of aggregates in macroeconomics today. 49 00:04:42.340 --> 00:04:52.340 These things really do make a difference in terms of the kinds of policies that are being pursued these days, and I'll get into a little bit more of that in a moment. 50 00:04:52.340 --> 00:05:05.940 But let me turn to Keynes' notion of the liquidity trap, which arises from his theory of interest, which itself is a curious stew of any number of unpalatable ingredients. 51 00:05:05.940 --> 00:05:16.940 For Keynes, his liquidity preference theory is based on convention, it's a purely monetary phenomenon, it's unhinged from time preference, 52 00:05:16.940 --> 00:05:22.940 It's independent of the capital structure and the price margins between stages of production. 53 00:05:22.940 --> 00:05:27.940 And it's a policy variable principally available for the central bank to manipulate. 54 00:05:27.940 --> 00:05:34.940 Now for a given stock of money, the level of the interest rate is determined by the speculative demand for money in Keynes' mind. 55 00:05:34.940 --> 00:05:41.940 But speculators operate, according to Keynes, only at one margin, holding cash balances or perpetuities. 56 00:05:41.940 --> 00:05:47.620 which in turn is determined as Keynes says quote not by the absolute level of the interest rate 57 00:05:47.620 --> 00:05:55.620 but by the divergence of that of what is considered a fairly safe rate but the safe rate is nothing more than a convention 58 00:05:55.620 --> 00:06:03.820 that is taken as given by Keynes and thus if the interest rate is below the rate speculators deem the quote safe rate 59 00:06:03.820 --> 00:06:11.820 they will avoid the prospect of capital value losses by holding money as cash balances on the presumption that interest rates will rise 60 00:06:11.820 --> 00:06:27.820 The basic narrative within the Keynesian system that is that once the liquidity trap clamps down, there is no mechanism really within the market system to restore the system to equilibrium. 61 00:06:27.820 --> 00:06:34.260 As Keynes argues, the system gets locked into an underemployment equilibrium, I'm quoting, 62 00:06:34.260 --> 00:06:40.340 in which interest rates fluctuate, quote, for decades about a level which is chronically 63 00:06:40.340 --> 00:06:42.700 too high for full employment. 64 00:06:42.700 --> 00:06:48.780 Now even if one were to agree with that diagnosis, which I don't, Keynes denounces speculators' 65 00:06:48.780 --> 00:06:57.340 behavior by introducing these fixed expectations as a kind of a wild card that upstages a reliable 66 00:06:57.340 --> 00:07:01.340 role for interest rates within the context of his helter-skelter system. 67 00:07:01.340 --> 00:07:08.340 Interest rates, as Rothbard highlights, should be allowed to rise as part of the corrective process. 68 00:07:08.340 --> 00:07:15.340 Yet the Keynesian approach subverts this adjustment by attempting to push rates lower. 69 00:07:15.340 --> 00:07:23.340 For Keynesians, the significance of the liquidity trap was to render further intervention by the central bank impotent. 70 00:07:23.340 --> 00:07:29.380 Rothbard, however, turns this argument on its head by demonstrating that credit expansion 71 00:07:29.380 --> 00:07:34.420 in creating an unsustainable boom requires a correction that could not be achieved by 72 00:07:34.420 --> 00:07:37.900 further credit expansion and lower interest rates. 73 00:07:37.900 --> 00:07:46.780 For Rothbard, the desire of investors to increase their cash balances was not only rational 74 00:07:46.780 --> 00:07:53.100 but also necessary in correcting the distortions generated by the preceding boom. 75 00:07:53.100 --> 00:07:58.540 But Rothbard's argument does not require the sort of ad hoc assumptions about expectations 76 00:07:58.540 --> 00:08:00.020 that Keynes deployed. 77 00:08:00.020 --> 00:08:05.220 Instead, cash balances increase as investors seek to convert financial wealth into the 78 00:08:05.220 --> 00:08:12.540 safer haven of money until the necessary market-level price-cost adjustments are made that increase 79 00:08:12.540 --> 00:08:14.460 profit spreads. 80 00:08:14.460 --> 00:08:19.560 As Rothbard says in quote, an expectation of rising interest rates really means that 81 00:08:19.560 --> 00:08:25.440 People expect increases in the rate of net return on the market via wages and other producers' 82 00:08:25.440 --> 00:08:32.440 goods prices falling faster than do consumer goods. Investors expect falling wages and 83 00:08:32.440 --> 00:08:37.440 other factor prices and they are therefore holding off investing in factors until the 84 00:08:37.440 --> 00:08:44.440 fall occurs. Rothbard emphasizes this resistance by investors to falling interest rates on 85 00:08:44.440 --> 00:08:51.440 In the Bernanke-driven Fed of today, we are in a kind of liquidity trap, but this is fully a by-product of deliberate policy to set short rates roughly at zero levels and to keep long rates in the two-thirds of the world. 86 00:09:14.440 --> 00:09:25.440 In inflation adjusted terms, these rates imply negative real rates at the short end and real rates of 1-2% roughly at the long end. 87 00:09:25.440 --> 00:09:43.440 This unfortunately makes perfect sense to Keynesians these days because the price adjustments that must be made at the market level to restore profit margins and confidence are for them not relevant at all for policy purposes. 88 00:09:43.440 --> 00:09:44.440 policies. 89 00:09:44.440 --> 00:09:50.120 Meanwhile, the effect of these policies is to layer yet more distortions onto the system 90 00:09:50.120 --> 00:09:56.980 and at the same time reinforce and institutionalize the very rigidities that are used to rationalize 91 00:09:56.980 --> 00:09:58.720 such policies. 92 00:09:58.720 --> 00:10:04.560 These Fed policies have been in play since 2008 at least, ones I'm speaking of at least, 93 00:10:04.560 --> 00:10:09.060 without having had any appreciable effect on output and employment, an outcome that 94 00:10:09.060 --> 00:10:11.280 would not have surprised Rothbard. 95 00:10:11.280 --> 00:10:16.280 Now I'd like to lead, this leads me into my second example. 96 00:10:16.280 --> 00:10:20.600 My discussion thus far illustrates Rothbard's unwavering insistence on the necessity of 97 00:10:20.600 --> 00:10:25.880 allowing the economy to correct itself, and these adjustments can only occur at the market 98 00:10:25.880 --> 00:10:30.880 level where prices are determined, but as hopefully discerned from my discussion of 99 00:10:30.880 --> 00:10:39.800 interest rates, that the Fed's actions are such that if the economy doesn't go through, 100 00:10:39.800 --> 00:10:47.360 One minute is fine, that the approach that these ideas represent are totally at variance 101 00:10:47.360 --> 00:10:54.480 with Rothbard's implicit arguments. At bottom, the problem is both causes and solutions to 102 00:10:54.480 --> 00:10:59.400 the boom bust cycle are framed in terms of a fictitious aggregate combined with the belief 103 00:10:59.400 --> 00:11:05.880 that the job of policy makers is to manipulate that aggregate. Keynes yearned indeed for 104 00:11:05.880 --> 00:11:09.560 or a theory of output and employment as a whole, right? 105 00:11:09.560 --> 00:11:12.080 And now we have the policy version of this version, 106 00:11:12.080 --> 00:11:14.160 vision quite securely ensconced 107 00:11:14.160 --> 00:11:16.820 as a precept of money macro policy. 108 00:11:16.820 --> 00:11:20.500 These central themes that Rothbard explores, 109 00:11:20.500 --> 00:11:23.080 both in terms of his critique of Keynesian economics 110 00:11:23.080 --> 00:11:26.200 and his defense of the Austrian approach, okay, 111 00:11:26.200 --> 00:11:28.320 are so important for us today 112 00:11:28.320 --> 00:11:30.500 because we are on this kind of precipice 113 00:11:30.500 --> 00:11:33.820 where the Fed's actions are really putting us 114 00:11:33.820 --> 00:11:37.660 into a very dangerous position of going off a cliff. 115 00:11:37.660 --> 00:11:40.620 So Man Economy and State is the book to read. 116 00:11:40.620 --> 00:11:43.740 It has all of the, I think, the framework 117 00:11:43.740 --> 00:11:45.720 for the correct answers, and of course, 118 00:11:45.720 --> 00:11:48.540 it is still highly relevant and necessary 119 00:11:48.540 --> 00:11:50.180 for today's understandings. 120 00:11:51.020 --> 00:11:53.020 Thank you very much.