I recently picked up a copy of Lionel Robbins’s 1934 book “The Great Depression” in a used book shop in Norwich, England. It’s quite revealing: judicious in tone, full of tables and facts, clearly meant to be seen as the work of a wise observer — indeed, a Very Serious Person.
And utterly, utterly wrongheaded.
“The first essential of any recovery from the position in which the world now finds itself is a return of business confidence,” declares Mr. Robbins. “But how is confidence to be restored?” He comes out against expansionary monetary policy, even to reverse the deflation of 1929-33. He doesn’t really have any logical explanation, but having decided that the problem is “confidence,” he declares that monetary expansion would create “uncertainty” and therefore hurt confidence. He condemns exchange rate flexibility, again because it creates uncertainty and undermines confidence.
And after surveying the wreckage all around him, he declares that the cause of the Depression was excessive government intervention, and the remedy, the thing needed to restore that all-essential confidence was … drum roll … a return to the gold standard.
You can sort of see how this kind of policy analysis based on superstition might have seemed plausible in 1934, although even pre-“General Theory” John Maynard Keynes could have explained just how wrong Mr. Robbins was (and did). But one would have hoped that we were past this sort of thing today.
The point, of course, is that we aren’t. A new report from the Bank for International Settlements that offers vague warnings about how low interest rates discourage responsible behavior is very much in the same vein as Robbins 1934, with much less excuse. Mr. Robbins suffered from the lack of a framework to make sense of events; the B.I.S., like so many economists, faced with exactly the economic syndrome Mr. Keynes analyzed — and for that matter even Milton Friedman would have seen as demanding strong action — has chosen to ignore that framework and play monetary Calvinball instead, where rules are made up on the fly to justify monetary tightening, whatever the circumstances.
I was originally going to end this post by saying something about stupidity, but that’s not right: the people at the B.I.S. aren’t stupid.
What’s going on here is something different and worse: the desire for conventional respectability
is outweighing the lessons of history; vague prejudice is trumping analysis. History will not forgive these people.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.