The second crisis of economic theory

Abstract

The title of this talk “the second crisis of economic theory” is related to the first crisis. the great slump of the thirties. It is the second crisis in our lifetime there were others before. What was the state of orthodox opinion when the world was struck by the great slump? First of all, there was the famous Treasury View of 1929. Great Britain had been suffering from heavy unemployment while the United States was enjoying the long boom which culminated in the great bull market on wall street. The main orthodox reaction to the slump was the argument that wages were too high. This could be backed up by statistical argument. In those old days, prices used to fall when there was a decline in demand, so that prices were lower relatively to money-wage rates than when employment was higher. In a style of argument nowadays familiar in another context, a correlation was exhibited as a cause. The theory that unemployment could be due only to wages being too high received solid support from the evidence. The second crisis of theory is already far advanced. I do not regard the Keynesian revolution. as a great intellectual triumph. On the contrary, it was a tragedy because it came so late. Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred. This time also the real situation is crowding upon us before we have begun to discuss our problems.