Sunday, January 25, 2015

Getting the story straight

The Marxists Internet Archive -- long my source when quoting Keynes -- also offers Geoffrey Pilling's The Crisis of Keynesian Economics. I just looked at it for the first time. I didn't read much, but this stood out right away:
Writing of the decade following the end of the war, J.K. Galbraith said, ‘Within a decade [after 1945] the belief that the modern economy was subject to a deficiency in demand – and that offsetting government action would be required – was close to becoming the new orthodoxy’.

That's Geoffrey Pilling's date in brackets there, not mine.

By 1950 then, give or take, the idea that aggregate demand was insufficient was pretty well accepted among economists... and, Galbraith adds, economists thought offsetting government action was required.

That's important, because it explains why Federal spending remained high. It explains why government spending did not drop back to a low level, as it was before the Great Depression and two world wars.

Graph #1: From Brad Delong's Fiscal Policy in the Shadow of the Great Depression (PDF, 21 pages)
The increase in Federal spending, from less than five percent of GDP to near 20 percent, was not an accident. Nor was it a conspiracy (liberal or otherwise). It was economic policy, designed to boost economic performance and to create both jobs and profits through free-market processes.


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