Any economic theory faces the same tests as any other scientific theory. It isn’t good enough to say well, look, it worked this time but didn’t seem to that time. A theory needs to be able to explain all the evidence: one counter-example is enough to kill a theory.
And Keynesianism, or at least the crude type that is argued over in politics today, has failed just such a test as Don Boudreaux Russ Roberts reminds us.
According to that basic set of theories about how the economy works, there should have been a huge recession in 1946/1947. In both the UK and the US: all those returning servicemen with no jobs. All that huge amount of government borrowing to pay for the war stopping, there should have been a plunge in aggregate demand and thus something between a recession and another Depression.
And yes, economists like Paul Samuelson were predicting exactly that.
According to the prescription, the two governments should have borrowed vastly more, spent more again, in order to prevent such a failure of the economy. This isn’t arcane, this is just straight simple Keynesianism.
However, that’s not what actually happened. The soldiers came home, the governments reduced the borrowing and the spending (the UK actually ran budget surpluses for several years) and yet the economy boomed. There was no recession, certainly not a depression, unemployment did not soar.
We can argue until the cows come home about whether Roosevelt’s New Deal ended the Depression (I think not, it extended it, your view may differ), whether Obamanomics will lead us out of our current difficulties (I think not) But Keynesianism as Keynesianism faces a much sterner test than this.
What happened to the 1946/7 recession? If it’s not possible to explain that absence within the confines of the theory then the theory is wrong, or at least incomplete, whatever we might say about the other two periods we love to argue about.
Tim Worstall
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