“A depression is for capitalism like a good, cold douche.”

Most of the comments on the FM site by folks discussing Austrian economics showlittle understanding of Austrian economics.  Here is an anecdote by a famous economist who met one of the great founders of Austrian theory.  A telling anecdote, revealing much about the difference between the Keynesian and Austrian schools of economics — and why Keynesians dominate in public policy decision-making.  And yes, the title is relevant to the post.

This post gives and excerpt from “The embarrassment of economics”, Robert L. Heilbroner, Challenge, Volume: 39-6, 1996 — Based on remarks made at Harvard’s Kennedy School of Government.

From Wikipedia:  “Robert Heilbroner (1919 – 2005) was an American economist and historian of economic thought.  The author of 20 books, Heilbroner was best known for The Worldly Philosophers (1953), a survey of the lives and contributions of famous economists, notably Adam Smith, Karl Marx, and John Maynard Keynes.”


Is economics free of ideology? No, says this eminent economist and historian of economic thought. And it would be best if economists acknowledged it.

I am approaching an age that can be called venerable, a process over which I have no control but which allows me certain privileges, among them saying outrageous things. This, I must warn you, is an outrageous speech, all the more so because it is delivered in dead earnest, despite a certain flippancy that may intrude from time to time. The subject is the degeneration – I am tempted to say “degeneracy” – of economics, a social discipline I hold, or rather wish I could hold, in the highest regard.

Let me describe my own introduction to economics. I entered Harvard in 1936 (hence venerable) and took my first course in economics the following year. Our textbook was Principles of Economics, by Frederick Garver and Alvin Hansen (one of America’s best-regarded economists). I should add that, although the Depression raged outside the classroom, it did not within the pages of this book. Published that year, only once did it mention the Depression. Without using the term “depression,” the text states that national income was estimated at $80 billion in 1929 but had fallen to about $40 billion by 1932. There is no further mention of these facts, their cause, significance, or cure.

The following year I took a more advanced course in economics taught by Wassily Leontieff. Our textbook was by Alfred Marshall – not, alas, the appendices but the text. The following year my most important course was Business Cycles, given by Hansen himself, who turned out to be a remarkable man. Although Hansen had disagreed with John Maynard Keynes’s General Theory when it was first published in the 1930s, he reconsidered, becoming Keynes’s foremost disciple in the United States. In his Harvard course, we heard from a wide range of instructors, such as the Marxist Paul Sweezy and Edward Chamberlain (who invented monopolistic competition).

This course was where I first encountered Joseph Alois Schumpeter, who plays a major role in what I am about to say.

Schumpeter arrived in his famous riding habit and great cloak, of which he divested himself in a grand gesture. He greeted us in a typically Schumpeterian way: “Gentlemen, a depression is for capitalism like a good, cold douche.” The remark shocked us for two reasons: First, was a depression a good thing? Second, few of us knew that a douche was the European term for “shower.”

That was enough to put Schumpeter in my head, where he stayed for a long time.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Some posts on the FM site about economics:

  1. The new President will need new solutions for the economic crisis, 9 October 2008
  2. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  3. Causes of the financial crisis (no, its not the usual list), 29 November 2008
  4. Government policy errors as a cause of the Great Depession, 1 November 2008
  5. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  6. Three people look at America’s economy, 5 December 2008
  7. About the state of economic science, and advice from a famous economist, 8 December 2008


13 thoughts on ““A depression is for capitalism like a good, cold douche.””

  1. That’s right, the problem with the economy in 1929 was that it was dirty. It was dirty because it had too many useless people clinging to it. It needed to go into the shower, turn on the water, and soak all those useless laborers cluttering the system. Soon, the soaking would wash them off of the economy’s body, and they would swirl down the drain. No muss-no fuss. Such a simple, healthy way to get rid of people, er, redundant elements in our wonderful system!
    Fabius Maximus replies: The idea is that the comment should be relevant to the post. Writting it about the title is borderline. esp when the comment does not exactly grip the subject of the post. In fact, the subject of the post is the opposite of what this comment describes.

    If it was intended as humor, the humor-appreication module of the WordPress software is not enabled on this site!

  2. For the sake of discussion, I’ll assume the following:
    – The anecdote is accurate
    – You and Heilbroner are presenting it in its intended context

    Still, the statement does not seem in line with the Austrian theory of business cycles. Perhaps Schumpeter disagreed with his colleagues on this point? Or perhaps “depression” was as much of a mistranslation as “douche”?

    If you’re goal is to demonstrate that Austrians = depressions, you take the time to find a little more substantial than a single sentence of hearsay.
    Fabius Maximus replies: Perhaps you should re-read the excerpt more carefully. it is absurd to day that “Austrians = depressions.” The point is that Austrians have few recommendations for “treating” depressions; Keynesians do. Hence policy-makers will choose Keynesian recommendations almost everytime (no matter what their effectiveness).

    This behavior is also seen in medicine. Doctors exist in almost every society throughout history, despite the fact that most of their treatments were at best neutral (the wonder-herbs of Hollywood lore are largely fictional). We generally prefer to do something and hope it works rather than wait and hope.

  3. Fabius, you’re right that I meant my comment humorously, sarcastically. I also meant it as a satire of Schumpeter’s economic views, and the reasoning which I percieve behind his utterance: “Gentlemen, a depression is for capitalism like a good, cold douche [shower].” I wished to examine and describe the “ideology” I see in Schumpeter’s statement, if you will.

    I had the impression that your post was also something of a satire of Schumpeter’s views, or at least an invitation to think about the reasoning behind Schumpeter’s statement, and what it says about the “Austrian School’s” ideology. As Heilbronner says, economics is not free of ideology. Was my comment too opaque, or too sarcastic?
    Fabius Maximus replies: Your comment was clear; I have a weak sense of humor.

  4. I’ve found Austrian Economics highly moral, its like the bible class for economists. Thats a lot to do with its appeal.

    I’ve always had a lot of time for Jim Rodgers and Marc Faber, two Austrian leaning investors, they have always been on the money, and pretty much consistent in there analysis of where this is all heading. And over the last couple of years they have not been far wrong either. Plus there genuine concern for the people who have saved and actually tried to be prudent during the boom has been refreshing.

    Has Keynesism ever been proven totally right? it did’ent really work in Japan during the 90’s or during the depression, although the argument was not enough was done, or the stimulus was ended to quickly is usually deployed, but this is usually unprovable, The fact of the matter is no one really knows. At the moment all we have is educated guess work. Keynesian stimulus is great in theory, but in practice we are relying on the goverment to get the stimulus package right. I believe they will go into this with the best intentions, but the road to hell ect ect. If the Package is perfectly pitched, moral hazard is not increased too much, the unsavable are not turned into zombie companies, the industries that will lead us to our future growth are supported, our future debt burdens are acknowledged and a plan put in place to start repayment, we dont engadge in printing money, and our creditors actully give us the money, well and good.

    But make no mistake Keynesian economic in the current climate is a high wire act, does anyone actually believe they are going to get it right?

  5. Surely I’m missing something here. You reject Austrian theory not on the basis of any specific argument that you cite then refute, but because one Austrian once said something vaguely risque (and probably mistranslated) as an analogy? I expected better from you FM. If this was instead an attempt to be subtle, subtlety works much more effectively in person where non-verbal cues can convey the real meaning.
    Fabius Maximus replies: You are misreading the post. Please see comment #2 above.

  6. I’m pretty sure FM meant the quote from Schumpeter to be taken seriously. It capsulizes one his firm convictions, that the only way out the current crisis is a vast deleveraging of inflated wealth.

    I dont know whether the world’s bankers and wealth holders realize this too – they didnt accumulate all that wealth without being smart — but I’m pretty sure that politicians, whatever they believe in their heart of hearts (a bold metaphor!) will never admit the true gravity of the moment. They will embrace stimulus packages, liquidity measures, money printing, mortgage relief — whatever it takes — in order to appear to be doing something to help the beleaguered citizen, while so constructing their efforts that they also help their financial supporters on the side.
    Fabius Maximus replies: I do not know of any economist who does not agree that the only way out of this crisis is deleveraging. Note deleveraging means reduced debt. That probably means reduced asset prices as a side-effect. The disagreements are over the magnitude of the necessary deverlaging, the path by which it occurs, the duration of the process, and the appropriate public policy response.

  7. Deleveraging does involve reducing debt, but that is not all. A certain amount of debt is manageable even in downturns. Derivatives leveraged at 30-1 of other derivatives themselves leveraged at 30-1 are not. So what we have here is a problem that involves far more debt speculation than debt per se, even though the debt levels are also too high in the first place. But that’s inevitable with any debt-based economy over time.

    These upper-level derivatives need to be eradicated ASAP so that the derivative tail stops wagging the ‘real’ economy dog. Without these instruments, the current housing downturn would not have threatened to bring down the world financial system. Nothing has yet been done to address this officially (I read one report recently saying that new CDS volume was increasing) although the major investment banks have either folded or morphed into ‘normal’ banks again. Until this is properly changed, it will be very hard to see what is actually going on and to what degree ‘normal’ debt is problematic.

    Unfortunately, if the downdraft gets truly destructive next year as looks likely, it might be very hard to see anything at all for all the dust in the air from pulverised economic bricks and mortar.

  8. Keynes was provably correct in one instance: “In the long run we are all dead.” Other than that, he is just good enough to sound impressive to poseurs and politicians. Balance the debt of the world on a razor’s edge and hope for the best. What rubbish!

    And by the way, you were not to be commenting on comments any longer.
    Fabius Maximus replies: Do you have a similarly simple-minded dismissal of Einstein? Keynes’ work has been the basis for macroeconomic management in almost every nation for decades, after generations of economists have built on his work. Nice to know that you even understand his work well enough to dismiss it. Any comments on his work on probability and uncertainty? Or capital heterogeneity and aggregate demand?

    Should you have a powerful rebuttal to Keynes, which I doubt, publish! Fame awaits you.

    If you read the comments on the Comments’ post, they advocated continuing to post comments on a more selective basis. So I have.

  9. The point is that Austrians have few recommendations for “treating” depressions

    That’s only true if you don’t consider preventative medicine to be a “treatment”. It’s certainly a harder sell, but if politicians steadfastly communicated the idea that government intervention is the cause of the drastic business cycle — as Austrians assert –, it’s just as doable as the status quo.
    Fabius Maximus replies: Next time you or one of your family go to the hospital with a serious illness, insist that you recieve only advice about preventive measures — which you appear to consider “treatment.”

  10. Next time you or one of your family go to the hospital with a serious illness, insist that you recieve only advice about preventive measures — which you appear to consider “treatment.”

    Once again, you refer to our economy as if it is a single individual capable of dying. That’s an invalid analogy and you know it. If Austrians are correct, their proposed rememedies will result in short-term pain and long-term stability.

    As you’ve said,

    The disagreements are over the magnitude of the necessary deverlaging, the path by which it occurs, the duration of the process, and the appropriate public policy response.

    this isn’t a matter of black or white, life or death; it’s a matter of degree. If there’s a course of action which increases short-term pain and decreases long-term pain, you’d better believe I’d expect my doctor to present that option. I’m certainly not alone on that point: chemo-therapy, gastric-banding, molar extraction, etc, etc.

  11. Keynsianism didn’t really work great till WWII. Keynes never analyzed how a mobilization for war functions other than it’s generic attribute of being a fiscal stimulus. Hence the logic; massive war mobilization =massive fiscal stimulus,massive fiscal stimulus =Keynesian policy writ large, ergo Keynes was right especially whole hog Keynes. But while all publicly funded wars are fiscal stimuli, all fiscal stimuli are not wars. Wars have many other economic consequences and exhibit far more transformative powers than anything posited by Keynes. I hope his theories are right for our sakes, but if WWII is the big vindication for Keynsian policy, how do we know the only thing that might work isn’t another huge war?
    Fabius Maximus replies: Both Keynesian policy and analysis have been used moderately successfully for 70 years, convincing academics and policy-makers (if not you). I find the disagreement with it in these comments quite odd, esp as the comments display little actual knowledge of Keynesian theory or economic history.

    BTW — the fiscal stimulus of the New Deal was small and intermitent compared with that of WWII, which accounts for its limited success. In the 1930’s FDR sougth to balance the budget, hence the tax increases and spending cuts (8%) which led to the 1937-38 downturn. Note Keynes gentle criticism of FDR’s economic othodoxy in this 1 February 1938 letter.

  12. One of your earlier posts noted that many intellectual giants were subsequently revealed to be dysfunctional irredeemable assholes. From this letter, Keynes is a stand out, an outlier data point, in this regard. A real man by any standard. I hope B.O. reads the part about care and feeding of avaricious businessmen.

  13. David Dzidzikashvili

    The only problem that we have to deal is greed and greed is a part of human nature, since no matter how well off we are we always want and strive for more. It’s our personal selfish best interest that is responsible for the destruction of the capitalist system and the world economic crisis.

    Profits = Greed.
    Fabius Maximus replies: All biological systems must generate a surplus over energy consumed in order to survive. In free market systems this is called “profit.” As for the rest, always nice to see a pure expression of religious belief in the FM site’s comments. It adds a note of both class and diversity.

    But what is this “destruction of the capitalist system” to which you refer? These cycles are part of the normal operation of free market systems. Some theorists say that they are an inherent aspect of the system.

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