The period Don talks about does not stand out for its unstable GDP. Sure, the postbellum 19th century real GDP was more dynamic with deeper recessions than the antebellum GDP (at least to the available quality of those numbers), and more dynamic than our last half century. But, it differed from both of those periods by a higher overall growth rate. And GDP was more stable with shallower recessions than in the preWW2 20th century.

So it makes for a mediocre point. It does seem that greater GDP growth is associated with dynamism, so I'm not so sure GDP stability per se is a desirable goal. It seems first and foremost you want GDP growth. Perhaps then a highly dynamic GDP with relatively shallow recessions should be the goal (who cares if positive growth is widely erratic, as long as it is positive). But then, that's what we had during the postbellum half century.

And, if you would like further discussion of the “unusual instability” during this era, please see: http://www.nber.org/papers/w15389

Your point regarding conventional wisdom is well taken, and it is unlikely any discussion thread has sufficient space to challenge a person's economic paradigm, but my main criticism of Boudreaux's letter is that it chastises Posner on a point by making a dubious claim regarding the late 19th century economy that, even if true, fails to establish Posner erred.

Without manipulation of the money supply, you expect deflation as a consequence of economic growth because there is a fixed money supply representing increased wealth. That is not a bad thing. But increasing the money supply at such a time cannot reasonably be construed as helping the economy. The only effect it has is to redistribute wealth from those furthest from the central bank to those nearest. That is a redistribution of rewards away from those who produced the rewards. That is not a good incentive for economic growth.

The realization that money is no more in need of manipulation than any other thing of value is what exposes monetarists like Milton Friedman as the central planners that they really are. For me, it is a great disillusionment against someone who said many good things.

It was the single greatest period of monetary stability in US history:

http://en.wikipedia.org/wiki/File:US_Historical...

“faster growing money supply would have likely increased real GDP and employment, and perhaps increased growth of real GDP.”

That is not an argument, but a disputed conclusion that is central the Austrian school's criticism.

“I would wager that a large majority of economist would agree that…”

If you are looking to have an impact from appeals to authority, you could not have come to a worse place. There is little respect for the “large majority of economist” here.

I for one love a good idea, however. You can add or detract nothing from an idea by its attribution.

http://en.wikipedia.org/wiki/File:US_Historical...

http://en.wikipedia.org/wiki/File:US_Historical...

To the Keynesiac, not enough.

“The government can finance spending out of private savings, but private business cannot?”

To the Keynesiac, private business DOES not.

“Business men are impacted by “animal spirits” but politicians are not?”

To the Keynesiac, yes. And if by “animal spirits” is meant a rational reaction to real circumstances, I agree.

At least, that's the liquidity clap-trap as I understand it.

Not that he didn't have some valid criticisms of Smith. But no hero is perfect, and despite his failings, Smith's positive impact Rothbard's values are greater even than Rothbard's.

On the other hand, we can't trust statesmen to replace demand lost to severe recession with demand for goods that individuals actually want to consume. Bushniks tried to construct this form of “stimulus” with temporary tax rebates, but it didn't seem to work well, possibly because the timing was off, possibly because employed people won't buy 10% more milk than they would otherwise have bought just because 10% of the labor force is unemployed, even if you give them a 10% bonus check. The needed “stimulus” is something like unemployment insurance, but $100/week doesn't replace most people's consumption, and $1000/week can discourage seeking other employment.

Of course, a state can employ everyone doing something. The issue is not some gross volume of stuff produced. The issue is how much free consumers value the particular goods produced. That's what we need markets to gauge.

Although real GDP was growing during this period, that growth was, in reality, marred by unusual instability. Even if you don't consider the “long depression” to be a “usual” marring of growth, a faster growing money supply would have likely increased real GDP and employment, and perhaps increased growth of real GDP.

At a minimum, Boudreaux's letter fails to indicate that the author's view of history is one not generally accepted by economists (http://www.nber.org/cycles/cyclesmain.html) or the people living through the time period in question (http://en.wikipedia.org/wiki/Panic_of_1893).

And even if we grant Boudreaux his view of late 19th century history, what does it show? I would wager that a large majority of economist would agree that “deflation . . . imperils economic stability,” even though it may not guarantee it.

The other “vital parts” of economic history overlooked by Posner do not appear very vital to Posner's essay. The central concern of the essay was the framework Keynes explicated and how he applied it to the great depression, the fact that Keynes built on previous economists' works can be assumed and was not a vital concern of the essay.

Clearly none of the policy prescriptions from any of these schools (except perhaps the post-Keynesians) would apply in a free banking system since there is no single monetary authority. Some Keynesian models might still work – the post-Keynesian credit-money model basically says the central banks is impotent to really affect the quantity of money anyway, so it might well still apply.

My guess is that the General Theory fits well with Judge Posner's personal views. He accepts the view that markets (made up of millions of common people) are irrational, while government (made up of the so-called elite) are rational. This idea is, of course, just nonsense. Everyone, including elites, can be, and often are, irrational. An irrational decision, and its effects, just last longer and are more severe if it is imposed by government. Masonomics has it exactly right in saying that markets fail, but use markets anyway. Life is not perfect, and it is time we all gave up on the illusion of an utopian society.

My thinking is that managed economies (via fiscal/monetary policy) are perhaps well described by Keynesian economics.

Keynesian economics therefore do not describe unmanaged economies (including free banking).