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Quotation of the Day…

… is from page 186 of Benn Steil’s and Manuel Hinds’s great 2009 book, Money, Markets & Sovereignty (footnotes excluded):

It is quite difficult to believe that the downward rigidity of wages could have played a major role in the escalation of unemployment during the Great Depression.  It is reasonable to surmise that people would refuse to see their salaries reduced (in the same job or through a change in jobs) if the probability of getting another job with the same salary was high.  Yet such refusal sounds unrealistic when, as was the case in the United States in the 1930s, the unemployment rate was on the order of 15% to 25%, and when the unemployed had to stand in line with their families just to get some charity soup.  The testimonies of people living through these times do not talk of people refusing to work at the prevailing wage.  On the contrary, people talk about their desire for work at any wage.

….  Yet the evidence suggests that the rigidity of nominal wages [between 1929 and 1932] was not the result of workers’ resistance to nominal wage reduction.  Instead, it was business leaders, under great pressure from President Hoover, who refrained from lowering wages even as stock prices, profits, and employment fell.  This policy so delighted Keynes that he wrote a memo to the British prime minister supporting Hoover’s action.  The fact that unemployment fell in Britain while deflation was raging supports the case that political meddling in the United States had more to do with the rise in unemployment than workers opting for near-starvation in preference to lower nominal wages.

We have here yet more evidence and plausible argument that

(1) Herbert Hoover was no devotee of laissez faire during his term in the White House;

(2) popular, ‘of-course-it’s-true’ beliefs are often mistaken (in this case, the belief that wages are naturally sticky downward and that such natural downward stickiness was a major cause of high unemployment in the U.S. in the early 1930s);

(3) J.M. Keynes, for all of his undoubted brilliance, was a lousy economist.  Keynes largely ignored the all-important microeconomic relationships and details and instead devoted his rhetorical skills to giving ancient man-in-the-street economic myths a gloss of faux-science.  (The ancient man-in-the-street economic myth that Keynes glossed so well and so catastrophically for economic science is the one that insists that what matters above all for the health of an economy is the volume and rate of aggregate spending – the correctness of relative prices, the appropriateness of the details of the structure of capital, and the economic and political implications of empowering the state to engage in active fiscal, monetary, and regulatory policies all be damned as insignificant when set beside the alleged overwhelming importance of maintaining aggregate demand at high levels.)