The Keynesians Were Wrong Way Before the 1970s

In an editorial published in the Wall Street Journal on 9/11, former Reagan and George H. W. Bush public official Peter Ferrara writes that “the fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies.”

Mr. Ferrara should get out more and read more, especially so the scholarly work of the Independent Institute’s own Robert Higgs, who argues convincingly that the intellectual poverty of Lord Keynes’s ideas was evident at the end of the Second World War, when massive cuts in federal government spending, which on the basis of Keynesian orthodoxy should have caused a return to pre-war recession or depression, actually launched a period of robust economic growth as scarce resources were reallocated from the production of military goods to that of civilian goods.

The lesson of Higgs’s analysis is that government cannot promote prosperity by massive deficit spending, but only by getting out of the way of entrepreneurial spirit of the private sector.