Edmund S. Phelps

Abstract

The early 1930s saw the titanic clash between Hayek, who saw the cessation of forced saving as the cause of economic depression, and Keynes, who saw the waning of the animal spirits behind investment demand as the source of most slumps. In the view of the former, recovery in the 1930s would have been fostered by a more generous supply of saving, while for the latter such a development would have made the depression worse. Victory in the debate was awarded to Keynes, of course. Yet the truth of the matter remains far from clear. The evidence that expected real rates of interest were elevated in the early 1930s, certainly not depressed, favors Hayek rather than Keynes. (To set right his account Keynes would need to add a liquidity-preference story to the animal-spirits story). The economics profession has instead sided with Friedman and the monetarists, who have pointed to a decline of the money supply relative to the level of money wages early in the decade.