Arnold Kling  

The Depression as a Positive Productivity Shock

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David Leonhardt quotes economic historian Alexander Field:

In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input

Sounds like a jobless recovery.

The Keynesian model of the Depression is that it was a problem of aggregate demand. The real business cycle model says that it was a negative productivity shock. The PSST model says that it was a transition from one pattern of specialization and trade to another, caused by a positive productivity shock. With tractors, farmers did not need laborers and tenant farming became uneconomical. With trucks, roads, and refrigeration, we needed less local meat and produce, so that farmland near cities could be converted to suburbs and returned to wilderness. In manufacturing, we needed a smaller fraction of labor devoted to production and more people to work on distribution and organization. More women found that their comparative advantage was in market work rather than housework. Thus, by 1950 we had very new patterns of specialization and trade.

I think something like that has been going on this decade. When this recession is over, my prediction as that we will see a very different composition of jobs and of the labor force. With much higher overall productivity.

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COMMENTS (7 to date)
Dave writes:

How does the credit bubble of the 1920s figure into this story?

From my link: "Credit fueled a real estate boom in 1925, a Wall Street boom in 1928-9, and a consumer durables spending spree spanning the second half of the 1920s."

That sounds like a pretty similar story to the Great Recession. Didn't these credit bubbles push resources into unsustainable patterns of trade, while their busts caused recalculations?

I don't think the story of credit is inconsistent with the PSST story or the idea that we will come out of the recession with much higher productivity. But it seems like a stretch to blame the Great Depression on a sudden burst of increased productivity.

Nick Bradley writes:


I think the point of this post is that a credit boom/bust was combined with a positive productivity shock caused a prolonged era of unemployment.

Dan S writes:

I believe Scott Sumner once made a point very similar to the one I'm about to make.

Productivity increases are not inconsistent with an aggregate demand explanation of the Great Depression. Between 1929 and 1941, if productivity grew on average 3% per year, then 1941's level of productivity would be over 40% higher than 1929's. Aggregate demand shortfalls are not supposed to also stifle productivity increases, so I don't think this in itself suggests PSST over aggregate demand.

Nick Bradley writes:

Dan S,

so would the correct Keynesian response be to smash productive forces, assembly lines and what-not?

Some Guy writes:

In the years 1933-1939, when unemployment was largely stagnant, annual GDP growth was 10%, 9% 13%, 5% -3.5%, 8%, 8%. This was about 7 percent annualized (even including the '37 recession). So in this case the economy was expanding extremely rapidly despite the unemployment which fits the theory that large gains we're being made by re-ordering our economy.

But in our current recovery, GDP is at the usual 2.5%, sometimes worse. So there are very clearly no massive gains from reordering the economy going on. Output per hour has increased over 3% the last two years, which is impressive, but not impressive to explain the disappearance of a tenth of the workforce from employment. So where are the signs of this positive shock? Are you saying they will just start suddenly start appearing two years down the road?

Doesn't it seem more like our economy is growing like normal but with 10% of the possible workforce simply removed from employment? Which in turn fits something like an AD theory or maybe Cowen's zero marginal product worker idea?

Steve Sailer writes:

This was a common view in 1945. It came as a great shock to many observers that the economy did not collapse back to the Depression in 1946. Perhaps the postwar prosperity is more in need of explanation than the Depression?

Mark A. Sadowski writes:

It is inportant to note that Fields is pointing to *total factor productivity* not *labor productivity* alone. TFP increased at an average annual rate of 2.8% from 1929-41. In 1995-2005 it increased at an average annual rate of 1.5%. Since 2005 TFP has, if anything, slown down.

Sorry, no evidence for PSST here either.

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