“A depression is for capitalism like a good, cold douche.”

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Most of the comments on the FM site by folks discussing Austrian economics show little understanding of Austrian economics.  Here is an anecdote by a famous economist who met one of the great founders of Austrian theory.  A telling anecdote, revealing much about the difference between the Keynesian and Austrian schools of economics — and why Keynesians dominate in public policy decision-making.  And yes, the title is relevant to the post.

This post gives and excerpt from “The embarrassment of economics”, Robert L. Heilbroner, Challenge, Volume: 39-6, 1996 — Based on remarks made at Harvard’s Kennedy School of Government.

From Wikipedia:  ”Robert Heilbroner (1919 – 2005) was an American economist and historian of economic thought.  The author of 20 books, Heilbroner was best known for The Worldly Philosophers (1953), a survey of the lives and contributions of famous economists, notably Adam Smith, Karl Marx, and John Maynard Keynes.”

Opening

Is economics free of ideology? No, says this eminent economist and historian of economic thought. And it would be best if economists acknowledged it.

I am approaching an age that can be called venerable, a process over which I have no control but which allows me certain privileges, among them saying outrageous things. This, I must warn you, is an outrageous speech, all the more so because it is delivered in dead earnest, despite a certain flippancy that may intrude from time to time. The subject is the degeneration – I am tempted to say “degeneracy” – of economics, a social discipline I hold, or rather wish I could hold, in the highest regard.

Let me describe my own introduction to economics. I entered Harvard in 1936 (hence venerable) and took my first course in economics the following year. Our textbook was Principles of Economics, by Frederick Garver and Alvin Hansen (one of America’s best-regarded economists). I should add that, although the Depression raged outside the classroom, it did not within the pages of this book. Published that year, only once did it mention the Depression. Without using the term “depression,” the text states that national income was estimated at $80 billion in 1929 but had fallen to about $40 billion by 1932. There is no further mention of these facts, their cause, significance, or cure.

The following year I took a more advanced course in economics taught by Wassily Leontieff. Our textbook was by Alfred Marshall – not, alas, the appendices but the text. The following year my most important course was Business Cycles, given by Hansen himself, who turned out to be a remarkable man. Although Hansen had disagreed with John Maynard Keynes’s General Theory when it was first published in the 1930s, he reconsidered, becoming Keynes’s foremost disciple in the United States. In his Harvard course, we heard from a wide range of instructors, such as the Marxist Paul Sweezy and Edward Chamberlain (who invented monopolistic competition).

This course was where I first encountered Joseph Alois Schumpeter, who plays a major role in what I am about to say.

Schumpeter arrived in his famous riding habit and great cloak, of which he divested himself in a grand gesture. He greeted us in a typically Schumpeterian way: “Gentlemen, a depression is for capitalism like a good, cold douche.” The remark shocked us for two reasons: First, was a depression a good thing? Second, few of us knew that a douche was the European term for “shower.”

That was enough to put Schumpeter in my head, where he stayed for a long time.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

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To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Some posts on the FM site about economics:

  1. The new President will need new solutions for the economic crisis, 9 October 2008
  2. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  3. Causes of the financial crisis (no, its not the usual list), 29 November 2008
  4. Government policy errors as a cause of the Great Depession, 1 November 2008
  5. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  6. Three people look at America’s economy, 5 December 2008
  7. About the state of economic science, and advice from a famous economist, 8 December 2008

Originally published at Fabius Maximus and reproduced here with the author’s permission.

2 Responses to "“A depression is for capitalism like a good, cold douche.”"

  1. Guest   December 18, 2008 at 4:13 pm

    It’s odd that so many people associate Austrian economics with Hayek and Schumpeter, when the Magnum Opus of the school of thought was Human Action, by Von Mises.

  2. PASTRELLO   December 26, 2008 at 6:17 am

    A COLD DOUCHE MAY BE GOOD FOR CAPITALISM, INSOFAR IT TAMES EXUBERANCE, BUT DIVING IN POLAR WATER IS NOT AS GOOD. HERE LIES THE DIVIDE BETWEEN AUSTRIANS AND KEYNES. THEY STARTED BY DEFINING APRIORICALLY ‘DOUCHE-DEPRESSION’ WHAT WAS GOING ON; HE WAS REALIZING THAT, INSTEAD, IT WAS A DIVE ON POLAR WATER. THE DIFFERENCE LIES IN STARTING FROM BOOKS OR FROM REALITY.