Thursday, June 07, 2007


Lately I've been reading Thomas K. McCraw's Prophet of Innovation, the biography of Joseph Schumpeter. Schumpeter was a famous economist in the early and mid 1900s. He was as famous as Keynes, if not more so. Around the time of the Great Depression, he published Business Cycles but it was not received well. There were some legitimate concerns but the most common critique was that it had no policy suggestions. Keynes' General Theory, however, did. In 1939, Schumpeter organized a seminar to discuss his book. But as McCraw describes became evident that almost no one had read the text. Afterward, several students said that they had never before seen Schumpeter genuinely furious, as he was on that occasion. One of them recalled that 'in the discussion everyone talked about Keynes and not about [Schumpeter's] work.'
Arnold Kling tells a similar story concerning the reaction to Keynes's work. Roosevelt misinterpreted General Theory to mean that one must restrict output to save the economy (as part of the New Deal, crops were burned, pigs were prematurely slaughtered, and "too much" production was made illegal). Keynes' book became a Frankenstein's monster--most of this critical ideas in understanding the nature of the Great Depression were ignored.

When disaster hits, people love to embrace a policy suggestion. Any suggestion, no matter how twisted or vague. Extreme scenarios and strong emotion are the realms where government expands most often and most dangerously. It is also, notably, where con artists thrive.

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