23rd December 2012
Russ Roberts takes a look at What Everybody Knows.
When I was younger, everyone knew that the New Deal had saved the US economy from the ravages of the Great Depression. Everyone knew that Keynes was right–look what had happened when Roosevelt implemented his ideas–the Great Depression ended! Eventually, everyone knew that story was false. The New Deal wasn’t that big and the Great Depression didn’t really end when the New Deal was implemented.
Now everyone knows that World War II ended the Great Depression. Of course, private consumption fell during WWII and the vaunted Keynesian multiplier seemed to only work for the defense industry. Someday, perhaps, people will understand that when a war takes over most of the industrial sector, you don’t get much stimulus. And it’s not hard to reduce unemployment when you force a huge chunk of the male working-age population into the army.
When the war ended, all the Keynesians predicted disaster and a horrible depression because of the cuts in government spending and men coming home from Europe and the Pacific. Well, when that didn’t happen, people should have known that there isn’t a simple relationship between government spending and prosperity. But somehow, people didn’t learn that lesson. And everyone forgot about it. (If you’re interested in how people maintained a belief in a theory that had been entirely discredited by events, you can read my earlier observations, here.)
How does it come to pass that everyone comes to know something that isn’t true? A simple answer is that if enough people treat it as true and those people have some credibility, then most people will assume it is true.