Underconsumption Theories and Keynesian Economics

Underconsumption theories and Keynesian economics. Interpretations of the Great Depression

Elisabeth Allgoewer

May 2002 Discussion paper no. 2002-14

Department of Economics University of St. Gallen Editor: Prof. Jörg Baumberger University of St. Gallen Department of Economics Bodanstr. 1 CH-9000 St. Gallen Phone ++41 71 224 22 41 Fax ++41 71 224 28 85 Email [email protected] Publisher: Forschungsgemeinschaft für Nationalökonomie an der Universität St. Gallen Dufourstrasse 48 CH-9000 St. Gallen Phone ++41 71 224 23 00 Fax ++41 71 224 26 46 Electronic Publication: www.fgn.unisg.ch/public/public.htm Underconsumption theories and Keynesian economics.

Interpretations of the Great Depression1

Elisabeth Allgoewer

Author’s address: Dr. Elisabeth Allgoewer FGN-HSG Dufourstr. 48 9000 St. Gallen Tel. ++41 71 224 23 00 Fax ++41 71 224 26 46 Email [email protected]

1 I would like to thank Mauro Boianovsky and Claudio Sardoni for helpful comments on earlier versions of this paper. All remaining errors are mine. Abstract

Underconsumption theories played an important part in the economic policy debates during the Great Depression of the 1930s. The commonsense appeal of the arguments and the clear cut policy advice secured their proponents’ popular support. Here, the contributions of John A. Hobson, Emil Lederer, Waddill Catchings and William Foster are analyzed. The background to their thinking in terms of the economic policy debates in the respective countries is discussed and compared. Switzerland is an interesting case in this context since there underconsumption arguments were the only arguments used to challenge the orthodoxy of balanced budgets with the demand for active government policies. In evaluating the contributions discussed here with regard to the innovations of Keynes’s General Theory on the one hand, the tradition of classical political economy on the other, it is argued that although underconsumptionists share certain concerns with Keynes’s analysis, central theoretical notions are carried over from classical economics.

Keywords

Pre-Keynesian business cycle theory, classical economic thinking, Keynesian economics, explanations for the Great Depression, cycles and growth.

JEL Classification

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