Arnold Kling  

The Great Depression

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The Great Depression continues to be a fascinating period to study. As Thomas Sowell points out, the myth is well entrenched that the New Deal pulled the economy out of the Depression.


Only now has a book been written in language that non-economists can understand which argues persuasively that the policies of the Roosevelt administration actually prolonged the depression and made it worse. That book is FDR's Folly by Jim Powell. It is very readable, factual and insightful -- and is endorsed by two Nobel Prizewinning economists.

Another interesting book is Randall Parker's Reflections on the Great Depression. The economists interviewed in the book, all of whom lived during the Depression, agree that the second World War, not the New Deal, revived the economy. The economics profession tends to view the New Deal as a mixed blessing at best.

Finally, this month's American Economic Review has an article by Alexander J. Field, who argues that when the Depression is measured from 1929 through 1941, rather than from 1929 through 1937, productivity growth was unusually rapid. Field calls the 1930's "the most technogically progressive decade of the century." If he is correct, then this is an interesting similarity with our current productivity-cushioned recession (aka the jobless recovery).

For Discussion. If productivity growth was rapid during the Great Depression, then does this undermine the argument that the New Deal had adverse impacts on the economy?


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CATEGORIES: Macroeconomics



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The author at Catallarchy.net in a related article titled Human Action, not Human Experimentation writes:
    Apropos to Jonathan's recent post on global warming and the scientific method, Arnold Kling points to this piece on the Great Depression by Thomas Sowell. An excerpt: Perhaps worse than any specific policy under FDR was the atmosphere of uncertainty... [Tracked on October 9, 2003 10:21 PM]
COMMENTS (10 to date)
Eric Krieg writes:

On the contrary. As a parrallel example, look at France and their mandated 39 and then 35 hour workweeks, which have caused businesses to replace labor with capital in an effort to raise productivity.

The same happened in the Depression, where many policies caused businesses to substitute labor for capital.

Generally it was unskilled blacks who took the brunt of the cuts, too. Which is ironic, since it was FDR who turned blacks from Republicans to Democrats almost singlehandedly.

Paul Jaminet writes:

The answer to your discussion question is clearly no, as Mr. Krieg says.

More interesting I think is the possibility that Great Depression could have been in part a Schumpeterian-style "creative destruction" depression -- a time of constructive restructuring in economic relationships -- not just a massive screw-up. Field's paper sounds intriguing.

David Thomson writes:

“More interesting I think is the possibility that Great Depression could have been in part a Schumpeterian-style "creative destruction" depression -- a time of constructive restructuring in economic relationships .”

This is my own suspicion. I have long argued that the gods of creative destruction often demand a ruthless price to be paid if our overall economy is to progress. What is good macroeconomically is not always the case for the individuals trapped in the cruel jaws of economic advancement.

I would also strongly urge everyone to view Mel Gibson’s 1984 film, The River. It dealt with the trauma endured by farmers who were losing their way of earning a living. I readily identified with the character played by Scott Glenn who had the thankless responsibility to get everyone to face reality. Thank God we are not a reactionary agrarian society envisioned by the intellectually immature authors of “I”ll Take My Stand.” A nation where about half of the population labors in the farm sector is an impoverished one. Unfortunately, though, it is rarely easy to find new work for these no longer employed farmers.

Lawrance George Lux writes:

The Great Depression was a special case which I explored in previous published works. The Stock Market crash occurred when Warehouse stocks were extremely high, the age of Consumer Product stocks was very low, and individual Consumers were heavily invested in the Stock Market. The Crash left Consumers with a shortage of Funds, Business with an excess of Product, while Business was in relative prime condition having no outrageous debt load.

Business could afford to cut it's labor force, supply it's Wholesale and Retail outlets from Warehouse stocks, and use the recouped labor costs to innovate technologically. Some of those conditions still operate Today, with Business using foreign outsourcing as substitute for Warehouse stocks. The problem remains the same as in the 1930s, how to reestablish Consumption levels, when the labor force cannot provide sufficient funds for the effort. lgl

Eric Krieg writes:

Okay this is a tangent...

http://www.amazon.ca/exec/obidos/search-handle-form/ref=br_ss_/702-9471187-0410413

WOW! 19 books. Way to go lgl.

And what breadth!

triticale writes:

I've studied only enough economics to enable me to get above my Marxist raiising. Long before I heard of "creative destruction" I understood that the disruption of the Depression was largely the result of ultimately benificial changes in the economy.

As a car enthusiast and railfan, I also recognise the great technology jump which was taking place. Rewritng the '30s with a monetarist president would make great alternate history science fiction; the US Civil War has been done to death.

Bill Brown writes:

What might have been the productivity growth had the government not intervened to the extent it did? That's the question that's both instructive and unanswerable.

It's like the financial system today. It seems really great, but would it be better if there wasn't the Federal Reserve? I think it would be better, even though it's settled into a groove right now.

The New Deal unquestionably did some harm to the economy. You can't introduce a dislocation of that scale and not see some repercussions. Perhaps the Great Depression would have been the Depression if the New Deal hadn't helped out all of those farmers who were losing their farms or employed all of the unemployed into massive public works projects (funded, of course, on extremely progressive taxes that dampened incentives to privately rebuild).

Bruce Moomaw writes:

"The economists interviewed in the book, all of whom lived during the Depression, agree that the second World War, not the New Deal, revived the economy. The economics profession tends to view the New Deal as a mixed blessing at best."

Odd. The line of most liberal economists is that WW II revived the economy where the New Deal failed precisely because the New Deal wasn't remotely big enough. If WW II isn't the exemplar of government-mandated spending programs, what is?

Eric Krieg writes:

>>Odd. The line of most liberal economists is that WW II revived the economy where the New Deal failed precisely because the New Deal wasn't remotely big enough. If WW II isn't the exemplar of government-mandated spending programs, what is?

Is it so odd?

The New Deal SUPPRESSED demand at a time when productivity increases ensured that production could easily outstrip demand (a situation that I believe we are in RIGHT NOW, globally).

What did WWII do? Eliminate the productive capacity of Germany, France, Italy, and Japan. All of a sudden, that American productivity was put to good use (first in war production, next in rebuilding Europe and Japan, as well as supplying pent up demand for consurmer goods after the war).

But examining the economic implications of WWII doesn't do us any good. We are not going to have another war with Europe or Japan, or even China, anytime soon. The question is, how do we stoke GLOBAL demand so that we can soak up some of the excess production capacity that the WORLD now has.

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