Paul Krugman is fond of claiming that Herbert Hoover was a "liquidationist" (he was not) and that the Hoover administration responded to the downturn by having the Federal Reserve System raise interest rates and by cutting spending.
Bob Murphy, who in my view is a real economist (not a Keynesian), takes on the Krugman version of American economic history in this article, which I believe is worth reading. He not only debunks the Krugman-Robin Wells (Krugman's wife) thesis, but also anticipates the counter-criticisms.
In his column today, Krugman continues his theme that the Fed and the government are not doing enough borrowing and spending to prop up the economy. I guess that trillion-plus-dollar deficits still are not enough for him.
However, I do wish to take on one element of his analysis, that being the definition of "prosperity" as being associated only with the rate of unemployment. Now, he only has the word in the title, but it is clear that he is saying that the rate of unemployment (or employment) is the key to prosperity.
I would like to argue that it is the other way around: a prosperous economy will provide employment opportunities. But there also is another point that Keynesians seem to forget: employment is a MEANS to an end, not an end in itself.
During the Cold War, I remember hearing a Marxist (card-carrying Marxist) "economist" claiming that Romania had a better economy than that of the USA because there was "no unemployment there." Now, he said this during the recession of 1982, when the rate of unemployment then was close to what it is today. Indeed, I remember hearing the critics claim (including men like John Kenneth Galbraith) that not only was the supposed "full employment" of the U.S.S.R. and its satellites "proof" of a "superior" economy, but THEY HAVE FREE MEDICAL CARE.
Now, what they did not point out was that the real standard of living for people in those countries was dismal, and medical care for the mundanes (those that were not part of the Communist Party ruling class) was pretty bad, to put it mildly. Furthermore, as James Bovard points out in this recent article, Romania, for all the lovefest showered upon it from different quarters, in reality was a most miserable place.
I bring up these points to note that full employment in itself is NOT an appropriate "goal" for an economy. Furthermore, I would say that "economies" do not have "goals." Instead, individuals have goals. An economy is a mechanism by which individuals produce and distribute things that help to meet their needs, in which individuals participate as part of their own means-ends frameworks.
The question we should ask is this: Why are there impediments to individuals being able to engage in those things which help us to meet our goals? If you are wondering why this is so, try starting your own business to make goods or provide services that others might want, and you will find that government provides a large number of barriers.
In some cases, such as delivering documents from one person to another, one might find that it is against the law, given the legal monopoly held by the U.S. Postal Service. Places like Cleveland, Ohio, which has been losing population for years, make it very difficult for entrepreneurs to get started, as Nick Gillespie notes in this recent article on the Reason website.
To the Keynesian, however, all of this is gibberish. An economy to them is nothing but a series of numbers to be stacked into GDP figures. In that view, assets are homogeneous and all that is needed is a little bit of inflation and -- Presto! -- we have an "economy."
There is a "great gulf fixed" between how Paul Krugman and I view an economy. Krugman despairs because the government is not spending enough money and the Fed is not printing enough to create high rates of inflation. I despair because the government is doing everything it can to destroy what still is relatively healthy in the economy in order to help its sick friends, like corn-based ethanol, "alternative" energy, and firms on Wall Street that are politically-connected.