The Keynesian Revolution, 1936–1965

Crouse, Eric R.

doi:10.1007/978-3-319-70545-3_2

Eric R. Crouse²

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Abstract

This chapter introduces John Maynard Keynes—the most important economist of the twentieth century—and the Keynesianism that dominated America from the late 1930s to the mid-1960s. Although the scholarship of Milton Friedman and Robert Mundell dealt a blow to Keynesian theory in academic circles, politicians maintained a Keynesian mindset as they addressed economic conditions. It was a time of optimism and most American leaders favored the rise of government intervention to ensure full employment.

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Notes

1.
John E. Miller, “From South Dakota Farm to Harvard Seminar: Alvin H. Hansen, America’s Prophet of Keynesianism,” Historian, 64, nos. 3–4 (2002): 604, 608, 614, 620.
2.
Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement (Orlando, FL: Harcourt, 1990), 91–92.
3.
Steven Pressman, Fifty Major Economists, Third Edition (New York: Routledge, 2014), 137.
4.
Pressman, Fifty Major Economists, 86, 134.
5.
Ibid., 134–135. Milton Friedman and Rose D. Friedman, Two Lucky People: Memoirs (Chicago: University of Chicago Press, 1998), 53.
6.
A. C. Pigou, Keynes’s General Theory: A Retrospective View (London: Macmillan & Co. Ltd., 1951), 1.
7.
Edward Meadows, “The Decadence of Economic Theory,” National Review, January 6, 1978, 23.
8.
Nicholas Wapshott, Keynes Hayek: The Clash That Defined Modern Economics (New York: W. W. Norton & Company, 2011), 172–173.
9.
Pressman, Fifty Major Economists, 140. On his homosexuality, see Paul Johnson, Modern Times: The World from the Twenties to the Nineties, Revised Edition (New York: HarperPerennial, 2001), 29–30, 167. Wapshott, Keynes Hayek, 5–6. Margaret MacMillan, Paris 1919: Six Months That Changed the World (New York: Random House, 2003), 478. W. Carl Biven, Who Killed John Maynard Keynes? Conflicts in the Evolution of Economic Policy (Homewood, IL: Dow Jones-Irwin, 1989), 11–12. At age 42, Keynes married Russian dancer Lydia Lopokova.
10.
John Maynard Keynes, Two Memoirs (London: Rupert Hart-Davis, 1949), 98.
11.
MacMillan, Paris 1919, 181.
12.
Friedrich A. Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation (San Francisco: Cato Institute, 1979), 97–98.
13.
Quoted in Johnson, Modern Times, 30.
14.
Ibid., 30. In Paris 1919, Margaret MacMillan also disagrees with Keynes. She writes: “When historians look, as they have increasingly been doing, at the other details, the picture of Germany crushed by a vindictive peace cannot be sustained” (481).
15.
Wapshott, Keynes Hayek, 13–14.
16.
Quoted in MacMillan, Paris 1919, 190.
17.
John Maynard Keynes, A Tract on Monetary Reform (LaVerge, TN: BN Publishing, 2008), 60.
18.
See Wapshott, Keynes Hayek, 54–56. Pressman, Fifty Major Economists, 141–142.
19.
Pressman, Fifty Major Economists, 142. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, 1964), 3. Biven, Who Killed John Maynard Keynes?, 15.
20.
Hayek, A Tiger by the Tail, 98.
21.
Ibid., 102.
22.
Keynes writes, the book’s “main purpose is to deal with difficult questions of theory, and only in the second place with the application of this theory to practice.” See Keynes, The General Theory of Employment, Interest, and Money, v. Biven, Who Killed John Maynard Keynes?, 36.
23.
Pressman, Fifty Major Economists, 145.
24.
Keynes’s Letter to Roosevelt: la.utexas.edu/users/hcleaver/368/368KeynesOpenLetFDRtable.pdf (accessed April 5, 2016).
25.
John Kenneth Galbraith, A Life in Our Times: Memoirs (Boston: Houghton Mifflin, 1981), 40.
26.
Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World (New York: Simon & Schuster, 1998), 51.
27.
Franklin D. Roosevelt: “Inaugural Address,” March 4, 1933. Online by Gerhard Peters and John T. Woolley, The American Presidency Project, http://www.presidency.ucsb.edu/ws/?pid=14473 (accessed August 18, 2017).
28.
Yergin and Stanislaw, The Commanding Heights, 51.
29.
Ibid., 52.
30.
William E. Simon, A Time for Truth (New York: Reader’s Digest Press, 1978), 113, 116.
31.
Walter Lippmann, The Good Society (New York: Little, Brown and Company, 1937), 40.
32.
Herbert Stein, Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton, Third Revised Edition (Washington, DC: American Enterprise Institute for Public Policy Research, 1994), 63.
33.
Although with less fanfare, President Hoover likewise saw government action as the solution. A participant and supporter of Roosevelt’s New Deal, Rex Tugwell wrote: “I once made a list of New Deal ventures begun during Hoover’s years as secretary of commerce and then as president… The New Deal owed much to what he had begun.” See Amity Shlaes, The Forgotten Man: A New History of the Great Depression (New York: HarperCollins, 2007), 149. According to Jude Wanniski, Hoover’s signing of the Smoot-Hawley Tariff Act of 1930 and bringing in higher income and business taxes were serious errors of government intervention that spelled economic disaster. See Jude Wanniski, The Way the World Works, Fourth Edition (Washington, DC: Regnery Publishing, Inc., 1998), 139–152. For a concise introduction to this argument, see Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Three Rivers Press, 2003), vii-xvi. Henry Aaron was one Democratic scholar who acknowledged that “Rooseveltian economic policy did little to stimulate the economy.” See Henry J. Aaron, Politics and the Professors: The Great Society in Perspective (Washington, DC: The Brookings Institution, 1978), 147.
34.
Friedman, Free to Choose, 5, 94. The Friedmans wrote: “As to the war, it is one thing for government to exercise great control temporarily for a single overriding purpose shared by almost all citizens and for which almost all citizens are willing to make heavy sacrifices; it is a very different thing for government to control the economy permanently to promote a vaguely defined ‘public interest’ shaped by the enormously varied and diverse objectives of its citizens” (94–95).
35.
Miller, “From South Dakota Farm to Harvard Seminar,” 604, 608, 614, 620.
36.
Ibid., 611, 613, 619.
37.
Friedman, Two Lucky People, 113.
38.
Pressman, Fifty Major Economists, 165. Sylvia Nasar, Grand Pursuit: The Story of Economic Genius (New York: Simon & Schuster, 2011), 275.
39.
Bruce Caldwell, ed., The Collected Works of F. A. Hayek, Volume II—The Road to Serfdom Text and Documents: The Definitive Edition (Chicago: University of Chicago Press, 2007), 18–20.
40.
Ibid., 21. Finer’s statement was the first sentence of his Road to Reaction (1945) book.
41.
Interestingly, Keynes told Hayek in a private letter that it was “a grand book.” Yet he did question Hayek’s judgment on drawing a line with his argument: “[Y]ou give us no guidance whatever as to where to draw it.” Quoted in Caldwell, ed., The Collected Works of F. A. Hayek, Volume II, 24.
42.
Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: The Penguin Press, 2007), 30.
43.
Ibid., 29–30, 40, 52–53.
44.
William F. Buckley Jr., God and Man at Yale (Washington, DC: Regnery Publishing, Inc., 2002), xi.
45.
Austin W. Bramwell, in Buckley, God and Man at Yale, xii.
46.
Ibid., lxi, 42, 58.
47.
Ibid., 46.
48.
Pressman, Fifty Major Economists, 225–226, 228.
49.
Paul A. Samuelson, “My Life Philosophy: Policy Credos and Working Ways,” in Eminent Economists: Their Life Philosophies, ed. Michael Szenberg (Cambridge: Cambridge University Press, 2001), 236.
50.
Buckley, God and Man at Yale, 52, 54.
51.
Ibid., 57.
52.
Ibid., 62–67.
53.
Ibid., 71, 74.
54.
Ibid., 90.
55.
Quoted in Charles Murray, Losing Ground: American Social Policy, 1950–1980 (New York: Basic Books, 1994), 22.
56.
Dwight D. Eisenhower, The White House Years: Mandate for Change, 1953–1956 (Garden City, NY: Doubleday & Company, Inc., 1963), 124.
57.
Ibid., 296.
58.
Since 1957, many conservatives have used this quote or a similar version.
59.
Yergin and Stanislaw, The Commanding Heights, 58.
60.
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: NJ: Princeton University Press, 1963), 601. The authors wrote that this particular economic expansion was “the shortest expansion during the postwar period.”
61.
Brian Domitrovic, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (Wilmington, DE: ISI Books, 2009), 65.
62.
For his critique of this affluence, see John Kenneth Galbraith, The Affluent Society (New York: The New American Library, 1958).
63.
Quoted in Aaron, Politics and Politicians, 149.
64.
Murray, Losing Ground, 18, 20, 22–23.
65.
Domitrovic, Econoclasts, 66.
66.
“U.S. Business in 1965,” Time, December 31, 1965, 48–49, 53.
67.
Biven, Who Killed John Maynard Keynes, 42–47.
68.
Simon, A Time for Truth, 97–99.
69.
C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956), 7, 334, 341–342.
70.
Todd Gitlin, The Sixties: Years of Hope, Days of Rage (New York: Bantam Books, 1989), 107.
71.
Ibid., 111–113.
72.
“Original draft of the Port Huron Statement,” Resistance and Revolution: The Anti-Vietnam War Movement at the University of Michigan, 1965–1972, http://michiganintheworld.history.lsa.umich.edu/antivietnamwar/items/show/128 (accessed August 18, 2017).
73.
Gitlin, The Sixties, 111–113.
74.
Michael Harrington, The Other America: Poverty in the United States (Baltimore: Penguin Books, 1963), 9, 14, 16.
75.
Ibid., 158.
76.
Ibid., 24.
77.
Ibid., 83.
78.
Ibid., 137, 145, 151.
79.
Ibid., 62, 164, 166.
80.
Ibid., 167.
81.
Myron Magnet, The Dream and the Nightmare: The Sixties’ Legacy to the Underclass (San Francisco: Encounter Books, 1993), 121–23.
82.
Ibid., 1, 125.
83.
Thomas Sowell, A Personal Odyssey (New York: The Free Press, 2000), 1, 5, 26, 37, 40–41.
84.
Ibid., 59–60.
85.
Thomas Sowell, A Man of Letters (New York: Encounter Books, 2007), 5.
86.
Thomas Sowell, Ethnic America: A History (New York: Basic Books, 1981), 275, 280.
87.
Thomas Sowell, A Conflict of Visions: Ideological Origins of Political Struggle (New York: Basic Books, 2007), 12–13.
88.
Ibid., 18, 23.
89.
On the conservative movement, see George H. Nash, The Conservative Intellectual Movement in America Since 1945, Thirtieth-Anniversary Edition (Wilmington, DE: ISI Books, 2008), xx.
90.
Henry Hazlitt, “Understanding ‘Austrian’ Economics,” Freeman 31, no. 2 (1981): 73.
91.
Mises’s Socialism first appeared in 1922 (English translation in 1936) and Human Action in 1940 (English translation in 1949). Hayek wrote that for “those of us who experienced its first impact, Socialism will always be his decisive contribution.” See Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis, IN: Liberty Fund, 1981), xxii.
92.
Jack High, “The Case for Austrian Economics,” The Intercollegiate Review, 20, no. 2 (1984): 39.
93.
Charles McDaniel, God & Money: The Moral Challenge of Capitalism (Lanham, MD: Rowman & Littlefield, 2007), 10. Craig M. Gay, With Liberty and Justice for Whom? The Recent Evangelical Debate over Capitalism (Grand Rapids, MI: William B. Eerdmans Publishing, 1991), 65n2. Nash, The Conservative Intellectual Movement in America Since 1945, 452. Hazlitt, “Understanding ‘Austrian’ Economics,” 67, 71, 75–77.
94.
See Henry Hazlitt, “Why Anticapitalism Grows,” Freeman 33, no. 7 (1983): 409–412.
95.
For a concise comparison of the Austrian and Chicago Schools, see Mark Skousen, Vienna & Chicago: Friends or Foes?—A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, Inc., 2005), 3–8.
96.
Biven, Who Killed John Maynard Keynes?, 56.
97.
Friedman, Two Lucky People, 19–20, 28.
98.
Nash, The Conservative Intellectual Movement in America Since 1945, 33–35. Friedman attended the first conference but had spotty attendance until later in his career.
99.
His best articulation of these ideas came later in Friedman, Free to Choose, 5, 70.
100.
Nash, The Conservative Intellectual Movement in America Since 1945, 447.
101.
Milton Friedman, Capitalism and Freedom, 40th Anniversary Edition (Chicago: University of Chicago Press, 2002), 38.
102.
Ibid., 1–2.
103.
Ibid., 3, 5, 195.
104.
Ibid., xi.
105.
Skousen, Vienna & Chicago, 11.
106.
Nash, The Conservative Intellectual Movement in America Since 1945, 452.
107.
Domitrovic, Econoclasts, 10. The emergence of supply-side economics in the 1970s owed much to Mundell’s formidable intellect.
108.
Ibid., 63–65, 67–68, 74, 89. Mundell’s work tested in academic circles became a key component of supply-side economics.

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Tyndale University College, Toronto, ON, Canada
Eric R. Crouse

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Crouse, E.R. (2018). The Keynesian Revolution, 1936–1965. In: America's Failing Economy and the Rise of Ronald Reagan. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-70545-3_2

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DOI: https://doi.org/10.1007/978-3-319-70545-3_2
Published: 14 February 2018
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-70544-6
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