This is a general response to a comment posted by Nottrampis. Once I began to write I realised my reply would be better as a post rather than a comment.
No matter what Keynesians argue, investment is not driven by consumer spending. This fallacy is based on a total misunderstanding of the nature of derived demand. (I shall deal with this fact in later posts). Investment is driven by the prospect of profit. In a free market the rate of interest determines the length of investment projects. Consumer spending has nothing to do with it.
In a multi-stage economy it is the volume of business spending that determines consumer spending. If it were otherwise the consumer goods producing industries would be less stable than the capital goods industries. They are not. No matter what any Keynesian asserts, the fact remains that the largest number of payments is not made by consumers to producers but between producers and producers, meaning that it is production that creates purchasing power and not wages. (Say’s Law again).
Now for some facts: It was estimated that out of the 14 million unemployed in March 1933 only about 1.5 million came from the consumer goods industries. This situation was entirely due to the colossal failure of the Hoover administration to grasp the reality of gross business spending. Unfortunately for the world Roosevelt was every bit as bad.
More facts for the crucial period 1929-1933: In 1929 the two-way division between employees and corporations was 81.6 per cent and 18.4 per cent respectively. By 1933 the employees share had rocketed to 99.4 per cent, payrolls fell from $32.3 billion to $16.7 billion and unemployment rose to 25 per cent. In the same period labour’s proportion of national income rose from 59 per cent to 73 per cent. Additionally, personal consumption as a proportion of GNP rose from 76 per cent to 83 per cent.
While every point I have raised here will be dealt with in much greater detail at a later date one thing does remain: the facts of the Great Depression do not support Keynesianism.
You wrote: “funny how there is no golden age in countries following classical economics”. You are wrong again. The nineteenth century was, at the time, considered the greatest because of its industry, inventions and growth in living standards. What gave us the nineteenth century is the same thing that laid down the foundations of our present prosperity. Compared to what preceded it, it was indeed a Golden Age.
As for Hawtrey, I have not read all of his books but I have read Century of bank rate, Good and Bad Trade, Art of central banking, and Currency and Credit. From an Austrian perspective his analysis of the trade cycle is dangerously wrong. With respect to Hawtrey warning about the Great Depression I presume you are referring to Ronald Batchelder and David Glasner’s paper Pre-Keynesian Monetary Theories of the Great Depression: What Ever Happened to Hawtrey and Cassel?
It is true that Hawtrey and Cassel expressed warnings but so did others. Writing for the Austrian Institute of Economic Research Report, February 1929, Hayek successfully predicted that “the boom will collapse within the next few months.” Colonel E. C. Harwood — who founded the American Institute for Economic Research — persistently warned that the Fed’s monetary policy would cause a depression. Benjamin M. Anderson used his position as chief economist at Chase National Bank and editor of the Chase Economic Bulletin to sound the alarm about the Fed’s monetary policy and the coming crisis that it was generating. Then there was Ludwig von Mises who had been warning for years that the central banks’ loose monetary policies would bring on a depression.
The brilliant Mr Keynes was not so prophetic. Felix Somary, a Swiss banker, recalled in his The Raven of Zurich (London: C. Hurst, 1960) that Keynes had approached him in the mid-20s for stock recommendations. Somary, who subscribed to the Austrian School of economics, refused to give him any, warning that a speculative bubble was emerging. Keynes cockily replied: “There will be no more crashes in our lifetime.” The financial collapse apparently did nothing to dent his self-confidence. Once the depression was underway he still hailed the price stabilization scheme that caused it as a “triumph.” When it suited him, Keynes’ conceit apparently left him unfazed by mere facts.
Hawtrey and Cassel, according to Batchelder and Glasner, blamed gold for the depression. The others I mentioned blamed the Fed’s loose monetary policies and its religious-like faith in a stable price level. Under the influence of Irving Fisher virtually the whole of the American economics profession had fell prey to the fallacy that a stable price level means there is no inflation. Yet it is this fallacy that led to the crash of 1929. The irony is that Ralph Hawtrey was one of the guiding lights of this dangerous policy.
Note: I believe that when dealing with the boom-bust phenomenon economists must also adopt a historical perspective. For any theory of booms and busts to be correct it must, like the laws of supply and demand, apply to all places at all times. This is why I shall be posting articles on medieval booms, Tulip Mania, the South Sea Bubble, the mighty crash of 1825, Britain’s Railway Mania of the 1840s and so on. I think it needs to be stressed that when speaking of the trade cycle Austrian economists are referring to a specific economic phenomenon and not to economic fluctuations in general.