Economists and their politics (in historical context)

In our discussions, the Great Depression (and the recent "Great Recession") has come up several times. So have the names of a few famous economists. And it may be worthwhile to put some of this in context - both intellectual/theoretical and historical.

We will have talked about four economists (e.g., from class, from things like Tommy Joe's recent posts, and upcoming with Stewart's book choice) and it is worth noting that they emphasize slightly different things. I will oversimplify at the outset, and we will complicate the story further as we go along.

In doing so, late me make a note about historical context. Keynes, Hayek, and Friedman were all deeply preoccupied with one historical moment: the Great Depression. It weighed on their minds, and the question was how to respond to such profound crises. (It is probably not too much of an exaggeration, though I hesitate to mention it, due to the corollaries of Godwin's Law: the Great Depression was THE central problem in 20th Century economic debates, much like the rise of totalitarianism became THE central problem of many debates in political philosophy at the same time: the interwar/Depression through WWII period was so morally/economically/politically catastrophic that it dominated much mid-century thinking across politics, philosophy, and economics.) So how to respond to such a depression?

Let's start with Milton Friedman, actually, even though he comes out of chronological order. Friedman saw inflation and deflation as (almost definitionally) monetary problems, and by extension they had monetary solutions. Inflation? Cut the money supply (or raise interest rates). Deflation? Expand the money supply (or lower interest rates). Let the free market work out the rest in the "real economy" we have discussed. This approach is called "monetarism", and Friedman suggested that the central bank could essentially be replaced with a computer. This minimizes active government intervention by avoiding more government spending, and it defends economic freedom; keep in mind, much of this debate is going on in the context of the Cold War and anti-Communism.

Keynes (who wrote before Friedman) had a different answer: sometimes monetary expansion is not enough (remember Japan's liquidity trap?), and you need the government to step in and stimulate the economy through fiscal means - especially by spending when others won't (call it a "spender of last resort"?), even if that implies borrowing and deficits, though Keynes would also have favored stimulative tax cuts in some circumstances.

Generally speaking, Hayek would have favored neither form of expansion, because the problem is that the booms that come before the busts are created by too much money. Let the real economy work it out with stable prices, even if that means short-term pain.  

Krugman would largely follow Keynes (and he considers himself a Keynesian), though his writing has given us a bit more on the importance of monetary policy, whereas the context for Keynes was about instances where fiscal policy was required.

Economist	Expansionary policy response?
Keynes	Fiscal
Hayek	Neither
Friedman	Monetary
Krugman	Both

One short-hand has been to put the Keynesians on the left and Hayek and Friedman on the right. Krugman is a Democrat and Friedman aligned with Republican economics (such as in the Reagan era), and you will find more contemporary liberals favoring Keynes and conservatives favoring Hayek. So if you prefer, herre is another way (which happens to align left and right) of looking at what types of intervention would these four favor when facing a depression or deep recession?   

		Fiscal expansion?
		Yes	No
Monetary expansion?	Yes	Krugman	Friedman
	No	Keynes*	Hayek*

* - [long asterisked note with necessary caveats:] Again, this is “what they are known for”, not the entirety of what they argued. Keynes was primarily known for advocating for expansionary fiscal policy (especially government spending) when monetary policy fails, but was not averse to expansionary monetary policy. Almost no daylight between him and Krugman on this; the distinction here is simply that Krugman has spoken more in our readings about the need for monetary policy, whereas the context for Keynes was much more about the need for fiscal stimulus. Also, do not take Hayek for being solely a libertarian that wants laissez-faire; he occasionally offered somewhat more nuance in his understanding of government involvement than that. Similarly, do not take Friedman (or anyone else, for that matter) to be simply in favor of expanding the money supply in all circumstances. Far from it - it is only in circumstances like depressions and deep recessions that the monetary "computer" would print more money. 

Another historical moment worth noting, as I think it informs this debate. The U.S. inflation of the late 1970s was a case that encouraged Friedman to argue for more restrictive monetary and fiscal policy (as happened under Reagan, and to a forgotten extent, under the late Carter presidency). That moment was one that continues to impact the thinking of inflation "hawks", much like the Great Depression haunted earlier generations. (To wrap the debate back around: people like Krugman would say that we are too beholden to anti-inflationary thinking today, much like the Great Depression itself was caused by several countries fearing inflation so much due to their post-WWI experiences that they allowed destructive deflation.)  

We could add into this mix a few other names that have come up, and figure out where they stand. Where would former Fed chair Ben Bernanke (or current Fed chair Janet Yellen, who has similar views) fit in this? And what about the guy we watched on video the other day: Rick Santelli? Hints: note there is only one of the four economists above that is alive, and that person long praised Bernanke for doing "whatever it takes" from the position of Fed chair to stimulate the economy, while the video link should give you some sense of where Santelli comes down.

There is much more to say on this, and I think talking it through will allow more of the nuance to come out. It will also allow us to get rather more into the contemporary politics of economic policy. Which is always fun.