Keynes, the National Industrial Recovery Act and the Demise of Nascent Real Business Cycle Analysis
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The National Industrial Recovery Act (NIRA) of 1933 called for a radical reorganization of U.S. industry, substantial wage increases, workers’ right to bargain collectively as well as unprecedented government works projects. In a letter to President Roosevelt, British economist John Maynard Keynes denounced the NIRA on a number of grounds, not the least of which was the fact that, in his view, it would hinder economic recovery. This paper offers an alternative interpretation of this crucial episode in New Deal history. More specifically, it will be argued that despite his openmindedness, Keynes failed to understand, let alone appreciate, both the underlying structural issues in the U.S and the underlying logic behind the NIRA as an instrument of economic recovery. This owed, in part if not in whole, to what appears to be his inability to appreciate and/or understand structural/technological issues and their role in economic downturns, including Great Britain’s post-WWI depression.
This paper main thesis is to re-examine Keynes’ position on the NIRA, making the following three arguments “(i) he was largely unware of the science behind the NIRA, (ii) his failure to appreciate the role of technology shocks in the business cycle went beyond the NIRA and in fact played a key role in the debate over the U.K.’s plight in the 1920s, and (iii) as the result of the combination of this shortcoming and later successes, especially with regard to the General Theory…. He single-handedly bud-nipped what at the time was nascent real business cycle analysis.” (page 4) What this list immediately shows is that this paper is trying to tackle too many things, each in it-self a thesis of a scholarly paper. This gives it a structure that is diffuse and cumbersome, and it does not go in enough detail for a convincing argument in each of these fields. Furthermore, the author starts the paper by reproducing the entirety of Keynes’ open letter, something unnecessary. Instead he could have focused on the aspects of the letter that are of importance to his argument. Overall I find that this paper should not be published as it stands. Aspects of the paper that are very interesting should be explored in other papers that will be valuable contributions to the field, and some aspects have already been explored in the author’s other contributions on this field. For this reason I do explore below some of the aspects of the three arguments put forward by the paper in sequence.
i) Keynes’ knowledge of the academics and policy advisers behind the National Industrial Recovery Act is an interesting question in itself. His open letter is clearly critical of the group, and one wonders if the attack has a more personal element. It would have been interesting if the author of this paper have found any information (from the archives or personal correspondence or elsewhere) of a more detailed view held by Keynes of some of the advisors behind NIRA. Leaving, however, aside the issue of dramatis personae the issue of the ‘science behind NIRA’ is itself an interesting question. The author touches upon some of the writings of NIRA in section ‘Reform as Recovery’ and this is the most interesting part of the paper. It has also been investigated by the author in a number of his other publications. In this paper, he produces a list of real-business-cycle-like theorists in table 2. It would have been interesting if he went into this list in more detail, as he discusses the table very briefly- if at all. This section could have given clearer indications how the various theorists bring forth a school of economic thought on growth and crises that was developing in the US at the time. This then could have challenged Keynes’ central dichotomy of the open letter, which is the separation of Recovery from Reform. I can see how a cogent critique of Keynes’ letter can happen on these lines, as Keynes’ argument emanates from a specific tradition and framework in economics. Other theorists who view crises as systemic in capitalism, may have also found this dichotomy misleading.
A related topic, again discussed too briefly in the paper, is why didn’t Keynes make more of an argument of electrification for recovery in the UK? This would have made sense in the 1930s, as he was advocating for more fiscal stimulus, and that kind of infrastructure spending would have both an immediate employment multiplier and a long term effect. This is briefly discussed in the paper, but I wonder if there is more to it, and whether it can be investigated in more detail.
ii) The second argument is less convincing partly because of the way it is phrased. Keynes being unaware of the arguments for real shocks in the economy is difficult to believe. This is different to the arguments in (i) above. It may be true that he was not fully aware of the writings of the authors relating with NIRA or electrification, but the importance of real factors in the business cycle is something that had a much wider currency at that time. For one, Dennis Roberston’s work on industrial fluctuations and their real factors is well known, and Heberler was compiling Prosperity and Depression (first edition 1937) that included a variety of non-monetary causes of the business cycle from a plethora of traditions and schools of thought (and had been in correspondence with the Cambridge Keynesians and Richard Kahn in particular). If the author is arguing that this group of authors around NIRA were producing a systematic theory of the business cycle based on real factors, that was distinct to all other theories cited above and around at the time, then this in itself is worth exploring and documenting in some detail.
iii) This third claim is to me the most difficult to understand. Real business cycles, as we know them today are models that started being developed in the 1980s and extend the general equilibrium framework to account for a class of real stochastic shocks. Economic theory of the 1920s and 30s had not formalised (yet) general equilibrium in this way to even start speaking about this type of stochastic shocks or dynamics in this way. So I wonder what does the author mean by this argument? If he means that Keynes’ General Theory completely transformed macroeconomic thinking for the next 30 years and put the Keynesian framework (over other existing frameworks) central to policy and academic work, then he is right, and this change is amply documented in the literature, and need not be repeated here. If the author means that Keynes’ General Theory may have shifted attention from the work of the theorists he outlines in table 2, this may be true, but it should be put in perspective vis-à-vis the general theoretical discussions of the 1930s, and there were many other players writing on crisis at the time than Keynes and the authors noted in table 2.
Beaudreau offers an interesting account of the National Industrial Recovery Act and Keynes’s reaction to it. The paper contributes in particular to our understanding of the thought of Tugwell and others, and their influence on the design of the NIRA, in emphasising the consequences of technological change (particularly electrification) for the US along with wage stagnation. Electrification is represented here as a ‘technology shock’ which accounted for a real business cycle whose solution lay in companies raising wages (on underconsumptionist grounds).
It would be good to see further development of this material. For example, the concept of ‘shock’ postdates the period and carries with it the understanding of real business cycle theory; the argument in the early twentieth century that technological change led to a cyclical process rather than a simple step-shift in growth path is not sufficiently explained. Why did wages not adjust to productivity change? Indeed it would be good to consider further the wider environment of economic and social thought in the US at the time, not least because of the strong current of thought (represented by some listed in Table 2 such as Soddy and C H Douglas) that the problem arose from the banking system rather than technology; part of the solution according to them lay in a ‘national dividend’ paid in state-monopoly money, combined possibly with price controls, which would support household consumption.
However the main focus of the paper is on Keynes’s reactions to the NIRA as set out in a letter to Roosevelt. It is argued here that Keynes reacted to the NIRA in relative ignorance of either the structural or financial theories of cycles and was thus unjustifiably dismissive of it; and that Keynes’s reaction and his subsequent success held back the progress of real business cycle theory. The former is an interesting question to explore. The latter requires a much more detailed study of the history of business cycle theory than is feasible as part of one paper. But in my view the former argument also needs more careful treatment.
Much is made of the expression applied to Roosevelt’s advisers as being ‘crack-brained and queer’ (used even in a subtitle, juxtaposed with ‘science’) to underscore the argument that Keynes was unreasonably dismissive of the NIRA and the advisers who supported it. But this in my view is to misread the tone of Keynes’s letter as well as its content. The paragraph in which this phrase appears attributed it to Roosevelt’s sympathisers, and was immediately qualified by admitting that the view in Britain of the situation in the US was ‘wildly distorted’. Having discussed how Roosevelt’s sympathisers view the NIRA, Keynes then asks ‘May I crave your attention, whilst I put my own view?’ In other words he is differentiating himself from the general (sympathetic) view he has just outlined. This is in a way a small matter of interpretation, but it is important because the expression is used to great rhetorical effect to support the paper’s argument.
Keynes’s argument against the NIRA was that priority should be given to recovery, which required measures to encourage investment and output, which would in turn bring about the higher wages and prices (and money supply) which were sought from reform. He argued that the reform measures of the NIRA applied in a recession might actually impede investment and output. But he did not reject the reform measures outright.
How far Keynes was familiar with discussion of the real impact of technological advance is a separate question which applied to the longer run; his concern here was to get the economy back onto a track on which reform could be considered. While it is a matter for debate how far Keynes was familiar with structural theories of the business cycle, it is a particular challenge to argue that he was unfamiliar with financial theories of the business cycle given debates on this in the UK and US at the time.