J. Bradford DeLong, who teaches economics at UC Berkeley and was a protégé of Larry Summer's dislikes Austrian economics, which he sometimes assails on his blog. You might reasonably expect that for this reason, I will lambaste his book, which, to no one’s surprise, defends Keynesian economics and the welfare state. But I’m going to disappoint expectations. The book contains a number of insights that merit highlighting, albeit accompanied by some bad arguments as well, and I will stress the former in what follows.
Before getting to the insights, though, I’d like to address a couple of gross distortions. DeLong asks, “Have I committed an error by lumping fascists in with Nazis? A great many people did (and some do) applaud fascists, after all. . . . Economist and darling of the far right Ludwig von Mises, born to Jewish parents in Austria-Hungary . . . wrote of fascism in 1927, ‘fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions . . . [and] their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.’ . . . In 1940, the Jewish-born Mises, too, emigrated to the United States . . . acknowledging that fists trump intentions.”
This passage suggests that Mises in 1927 thought the Nazis, like the Fascists, had “good intentions” despite their anti-Semitic rhetoric but learned to his cost that was false when he had to emigrate owing to his Jewish origins. Mises, in fact, was always a bitter opponent of the Nazis and criticized the Austrian social democrats in the 1930s for insufficient vigor in the fight against Adolf Hitler. The passage has often been misunderstood by critics of Mises. For a fuller discussion, see my mises.org article “Mises and Fascism."
DeLong also makes up out of whole cloth an accusation against Herbert Hoover, who often features in the book, usually to his discredit. DeLong says: “Stalin and his subordinates saw, after the post–World War II consolidation, that there were five tasks they needed to carry out. First, they had to build the USSR up militarily to defend the territories of really-existing socialism because the fascist-militarist capitalists might well try once again to destroy world socialism by military means. That was a reasonable notion . . . [E]x-president Hoover thought the United States had quite possibly fought on the wrong side in World War II. Although Hoover deeply regretted that the war had advanced the development of weapons of unbearable power, a president who thought like him might well use those weapons.” Hoover, in fact, favored staying out of World War II, and it is a travesty to say he thought the United States should have entered the war on the Nazi side. Further, he opposed the use of atomic weapons and, along with Robert Taft, favored a defensive Cold War strategy that avoided overseas commitments.
After this, you might wonder what can be good about the book. But I would still claim it has many good insights. For one thing, DeLong has a firm sense of the immense power of the free market to achieve economic growth. He credits Friedrich Hayek, whom he calls a genius, for the widespread theoretical recognition of this: “Hayek was a farsighted genius Dr. Jekyll in one crucially important aspect of his thinking. . . . He was the thinker who grasped most thoroughly and profoundly what the market system could do for human benefit. All societies in solving their economic problems face profound difficulties in getting reliable information to the deciders and then incentivizing the deciders to act for the public good. The market order of property, contract, and exchange can—if property rights are handled properly—push decision-making out to the decentralized periphery where the reliable information already exists, solving the information problem. And by rewarding those who bring resources to valuable uses, it automatically solves the incentivization problem. . . . Overall, what Hayek got right is absolutely essential in making sense of the long twentieth century’s economic history.”
But Hayek, in DeLong’s view, did not get everything right: his insights need to be supplemented by the wisdom of John Maynard Keynes about macroeconomic policy and Karl Polanyi about the need for rights that go beyond property rights. I’ll forego an account of DeLong’s ideas about these two thinkers, because another insight of his enables us to forestall the case they made for intervention in the free market.
This insight is found not in the book, but in an interview of DeLong by Tyler Cowen in 2023. In the interview, DeLong says: “Back before 1870, there’s no possibility at all that humanity is going to be able to bake the economic pie sufficiently large that everyone can have enough. Which means that, principally, politics and governance are going to be some elite constituting itself and elbowing other elites out of the way, and then finding a way to run a force-and-fraud domination and exploitation scheme on society so that they at least can have enough. When Proudhon wrote in 1840s that property is theft, it was not metaphor. It was really fact.”
In other words, DeLong agrees with Franz Oppenheimer and Albert Jay Nock that the state is a predatory instrument of the ruling class to exploit society, but, unlike them, he limits this insight to the period in which the economy couldn’t generate enough wealth to feed everybody. But why does he think the predatory class will relent in its zeal for exploitation once economic growth generates a prosperous society? Even if Keynes is correct about macroeconomics and Polanyi about rights, which I do not for a moment believe, why trust a powerful state to shape the economy and society? Wouldn’t it be safer to limit the state drastically, or do away with it altogether, and leave it to people to solve their problems without state coercion?
Although DeLong is firm in his loyalty to Keynes, he recognizes the grave dangers posed by inflation, and it is difficult to deny that Keynesian policies have often led to this. DeLong says, “From an economist’s perspective, an inflationary episode like what happened to the United States in the 1970s might not seem to matter much. . . . Some lose, but others gain as much. With no strong reason to think that the losers are in any way more deserving than the gainers, economists might ask, why should anyone, including economists, care very much? This view is profoundly misguided. . . . [W]oven through this passage [from Keynes about inflation] is another effect of inflation: one can usually pretend that there is a logic to the distribution of wealth—that behind a person’s prosperity lies some rational basis, whether it is that person’s hard work, skill, and farsightedness, or some ancestor’s. Inflation—even moderate inflation—strips the mask. There is no rational basis. . . . And a government that generates such inflation is obviously not competent.” Again we ask, Even if one accepts Keynesian macroeconomic policy, doesn’t the danger that the inflation would undermine social acceptance of the logic of distribution outweigh the supposed economic benefits of the policy?
DeLong would no doubt dissent, averring that the market economy cannot deal effectively with severe depressions. He challenges the view, which he wrongly ascribes to the Austrians, that “neutral” money suffices to prevent economic calamity. “Right-wingers trying to hold tight to their belief that the market could not fail but only be failed, claimed that the Great Depression had been caused by government interference with the natural order. Economists such as Lionel Robbins, Joseph Schumpeter, and Friedrich von Hayek claimed that central banks had set interest rates too low in the run-up to 1929. Others claimed that central banks had set interest rates too high. Whatever. What they agreed on was that the central banks of the world had failed to follow a properly ‘neutral’ monetary policy, and so had destabilized what, if left alone, would have been a stable market system. Milton Friedman was chief among them. But dig into Friedman’s thesis that the Great Depression was a failure of government and not of market, and things become interesting. For how could you tell whether interest rates were too high, too low, or just right? According to Friedman, too-high interest rates would lead to high unemployment. Too low interest rates would lead to high inflation. Just-right interest rates—those that corresponded to a ‘neutral’ monetary policy— would keep the macroeconomy balanced and the economy smoothly growing. Thus theory became tautology” (emphasis in original).
This criticism of Friedman leaves Austrian theory unscathed. In the Austrian view, the task of the central bank is not to strive for “neutral” money (some early missteps by Hayek to the contrary notwithstanding). This cannot be its task, because Austrian theory regards the very existence of a central banking system run by the government as interfering with the operation of the free market. There is, then, no problem of finding the “correct” interest rate that balances inflation against unemployment. The free market rate just is the correct rate.
Many readers may think I have been too easy on DeLong; a few may deem me too hard. I do not claim to be “neutral,” but I have tried to be fair; with what success you must judge for yourself.
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