Being a libertarian I have a hard time accepting government involvement in the economy. But something has always bothered me. History credits FDR with pulling America out of the Great Depression. Would the free market have been able to fix itself without the government stepping in? Is this the exception to the rule?
FDR actually prolonged the depression with price fixing and wage controls. This caused mass unemployment.
The depression was relieved not by government but by the natural tendencies of economy to reach an equilibrium – i.e., people still need to eat and there are those who will figure this out and make it happen.
One statistic that helped “stabilize” the great depression is the fact that many young men were sent to their death thus “correcting” the unemployment problem.
Many people credit WWII with stabilizing the economy but any good libertarian understands destruction doesn’t create wealth – it destroys it.
In a nutshell depressions were a common occurrence at fairly regular intervals all throughout the 1800’s. The Great Depression was by far the largest but hardly the only. Seems to me the most devastating before the GD was one in the 1870’s, but I’m at work and don’t have my library here.
One part of the GD, as I understand it was compounded by government meddling. Most countries slapped stiff import duties on everything in an effort to start up their economies again, but all that did was cause stagnation, worsening the problem. Very little thinking had been given to economics as a practical tool, as we have it now. It was the GD that caused that shift in thinking.
On the other hand, the economic systems were pretty rotten too. One reason that the GD happened was over speculation that led to huge quantities of debt which could not be collected, i.e., there was no regulation or accountability on the parts of corporations. With that sort of a base, being left to their own devices was probably a pretty hopeless affair too for companies. Oh sure, there would have eventually been some rebound, but that would have likely caused some other meltdown later.
FDR’s solution was effectively to throw in with the most forward looking types of the day… the Italian Fascists (Mussolini was a very articulate writer and extremely popular at the time). As left-wingers they pioneered a lot of the sorts of public works projects that inspired the CCC. This is precisely why FDR was vilified publicly as a socialist in the press. They weren’t too far off the mark and the US had never seen any sort of mobilization like that for peacetime before or since. Of course, so many common people had lost everything that this was welcomed relief and history shows it really was the right thing to do at the time. None of which supports Libertarian thinking, I’m afraid.
Just to hop on a soapbox for a minute… Economies are huge and complex entities that achieve their own equilibrium (which might include dizzying cycles of crashes). Having the government try to run an economy always fails (check out the USSR or any others) simply because the complexity will torpedo any planning that some group can conjure up. What seems to work best is some form of watching and public accountability (no more Enrons) with the prospect of tinkering only in times of need. This is what mostly has happened in the US since the 1930’s. There have been downturns, but these have been extremely mild compared to what they might have been.
– jj
Edit: I didn’t answer one part of your question. How did it end? Certainly not with the economic policies in place in the 1930’s. The Nazis mass public works programs started out being a good short-term solution (like everything Hitler did) but by the late 1930’s it was clear that the world economy was shrinking again, with the Germans taking the lead. The invasion of Poland was Hitler’s next solution to the Nazis astonishing mismanagement of their economy. But that’s a long story too… What most likely ended the GD was the economic rebound post WW II, the fact that the Americans coughed up huge sums of money in the Marshall Plan and finally that they forced Western Europe to have free markets.
So government meddling prolonged or worsened the depression, but did it help to start it or did the government largely stay out of the economy until the GD?
jj- I agree with you about the economy being too large and complex
Do you think that gov has a hard time controlling the economy because it is incompetent or is gevernment meddling in the economy inherrently wrong, i.e. would even an intelligent government economic system fail?
[quote]WanderingAtheist wrote:
Do you think that gov has a hard time controlling the economy because it is incompetent or is gevernment meddling in the economy inherrently wrong, i.e. would even an intelligent government economic system fail?[/quote]
It is essentially an epistemological problem: take a relatively simple issue, like the price of a single commodity. Outside the pricing that happens in a market place, how does a “central planner” determine the price? The price, at any given moment, is the outcome of millions of decisions by sellers and purchasers - information that the central planner has no access to.
Now add in the element of time - millions of decisions every second. Now, imagine millions and millions of products/services, the pricing of which is interdependent; how can any central planner gather, synthesize, comprehend this data to extract pricing information? Etc.
It’s impossible to do, which is why any price controls invariably end up causing massive supply problems and general dislocations. Which means that the central planner has to assume more control of the economy - which, of course, means controlling people. This is why communism means, inevitably, totalitarianism.
If you’re interested in this sort of thing, look into the Austrian School of Economics (Hayek, Mises, etc.)
Complexity in the economy is good. What on earth makes you think otherwise?
AFAIK, massive federal spending [edit: for the war effort] that finally pulled the US out of the GD.
During the GD, the federal government erroneously believed that “low prices” were the problem. So they were dumping milk on farms across the nation in hopes of reducing supply and increasing prices. Meanwhile, there were people starving, etc.
Finally, it is worth remembering that, in fact, the US economy was recovering on its own. The stock market in the months following the great crash was actually recovering quite well. There are those who say it was the response to the crash that caused the GD.
For example, I believe the monetary policy was damaging and counterproductive too - in fact, I know there are legitimate economists that argue that it was monetary policy that plunged the country into the GD.
My 2 cents. ~katz
[quote]katzenjammer wrote:
It is essentially an epistemological problem: take a relatively simple issue, like the price of a single commodity. Outside the pricing that happens in a market place, how does a “central planner” determine the price? The price, at any given moment, is the outcome of millions of decisions by sellers and purchasers - information that the central planner has no access to.
[/quote]
Excellent explanation. I agree.
Just to second your props to the Austrian School, I must recommend a great Austrian economics intro that everyone should read that isn’t as complex as Mises.
Economics for Real People
I believe the government should be involved with influencing the economy, to a point, but the problem really comes in when the government tries to control it.
Also what makes anybody think the government has any ability to run an economy? Look at how the American government cannot make a budget, has an atrocious amount of debt,and lies on the books.
And now we are supposed to believe it can properly manage an economy?
Also it really should be more of a hands off approach.
The government does not manage things for the benefit of the economy. They will say that, but every new regulation transfers more power to the government.
These wonderful regulations have prevented the building of new refineries forcing us to import refined gas instead of refining it here.
It has stopped the building of new-q-ler power plants, preventing the creation of cheap abundant energy in this country.
It has turned corn into the bottom half of the fucking food pyramid.
Most of it has to do with special interests, and bribes. (Uh, I mean campaign contributions, yeah, thats what I meant.)
[quote]The Mage wrote:
These wonderful regulations have prevented the building of new refineries forcing us to import refined gas instead of refining it here.
It has stopped the building of new-q-ler power plants, preventing the creation of cheap abundant energy in this country.
It has turned corn into the bottom half of the fucking food pyramid.
[/quote]
Complexity strikes again. Supply and demand are the crucial information about the economy, actually, as opposed to side effects. This is why a more laissez faire approach is probably better. Goods and services then get allocated where they need to be. Central planning then will always be the wrench in the system.
Historical aside, the official Soviet economy was a disaster, but the unofficial black market – roughly 5% of the economy was the one that actually kept the whole thing afloat. The Russian mafia was tolerated as a necessity then. When the USSR imploded we saw it end up with an economy the size of the Netherlands for the largest country on Earth and that was left was the mob. The standard of living in the USSR was higher in 1913 than in 1989. Nobody would have believed what a real mess it was right before the fall. And they were the success story for communism.
but
That is not the whole story. For instance, pharmaceutical companies would certainly be more profitable without the FDA but we really do not want to go back to the sorts of things that were done a century ago, do we? How about pure food laws? Fair compensation? Corporate liability for damages and theft? The only fully capitalist segment of the economy is probably drug dealers which is hardly attractive, although it is very lucrative for some.
I think this is where it gets hard. Neither extreme is what we want and pretty much every bit of meddling will require a separate case so we get analysis paralysis. I suspect we are consigned to waffling back and forth between intervention and laissez faire. What is needed is a checks and balances system to monitor what happens and make sure it does what it should.
Look at the mortgage crisis. These companies were blasted as being discriminatory a few years ago because they wouldn’t lend to poor people. They did that and now they are going under.
[quote]jj-dude wrote:
In a nutshell depressions were a common occurrence at fairly regular intervals all throughout the 1800’s. The Great Depression was by far the largest but hardly the only. Seems to me the most devastating before the GD was one in the 1870’s, but I’m at work and don’t have my library here.
One part of the GD, as I understand it was compounded by government meddling. Most countries slapped stiff import duties on everything in an effort to start up their economies again, but all that did was cause stagnation, worsening the problem. Very little thinking had been given to economics as a practical tool, as we have it now. It was the GD that caused that shift in thinking.
On the other hand, the economic systems were pretty rotten too. One reason that the GD happened was over speculation that led to huge quantities of debt which could not be collected, i.e., there was no regulation or accountability on the parts of corporations. With that sort of a base, being left to their own devices was probably a pretty hopeless affair too for companies. Oh sure, there would have eventually been some rebound, but that would have likely caused some other meltdown later.
FDR’s solution was effectively to throw in with the most forward looking types of the day… the Italian Fascists (Mussolini was a very articulate writer and extremely popular at the time). As left-wingers they pioneered a lot of the sorts of public works projects that inspired the CCC. This is precisely why FDR was vilified publicly as a socialist in the press. They weren’t too far off the mark and the US had never seen any sort of mobilization like that for peacetime before or since. Of course, so many common people had lost everything that this was welcomed relief and history shows it really was the right thing to do at the time. None of which supports Libertarian thinking, I’m afraid.
Just to hop on a soapbox for a minute… Economies are huge and complex entities that achieve their own equilibrium (which might include dizzying cycles of crashes). Having the government try to run an economy always fails (check out the USSR or any others) simply because the complexity will torpedo any planning that some group can conjure up. What seems to work best is some form of watching and public accountability (no more Enrons) with the prospect of tinkering only in times of need. This is what mostly has happened in the US since the 1930’s. There have been downturns, but these have been extremely mild compared to what they might have been.
– jj
Edit: I didn’t answer one part of your question. How did it end? Certainly not with the economic policies in place in the 1930’s. The Nazis mass public works programs started out being a good short-term solution (like everything Hitler did) but by the late 1930’s it was clear that the world economy was shrinking again, with the Germans taking the lead. The invasion of Poland was Hitler’s next solution to the Nazis astonishing mismanagement of their economy. But that’s a long story too… What most likely ended the GD was the economic rebound post WW II, the fact that the Americans coughed up huge sums of money in the Marshall Plan and finally that they forced Western Europe to have free markets.[/quote]
That’s excellent. While I think government attempts to plan economies are always disastrous, in troubled times the government has to at least appear to take action to keep the masses calm, otherwise desperate people turn to extreme answers like socialism, communism, etc. So even if FDR’s actions prolonged the depression, better that than let the country tear itself apart.
[quote]LIFTICVSMAXIMVS wrote:
Economics for Real People
Economics for Real People | Mises Institute [/quote]
thanks a lot!
Sorry, Lifty, too much misinformation or generalities
[quote]LIFTICVSMAXIMVS wrote:
FDR actually prolonged the depression with price fixing and wage controls. This caused mass unemployment.
[/quote]
Can you name any wage and price controls instituted before 1942?
I am not yet aware of any. The OPA was not started until the WWII was underway
With regard to causing mass unemployement. let’s look at two sets of figures:
Unemployment (% labor force)
Year Lebergott Darby[54]
1933 24.9 20.6
1934 21.7 16.0
1935 20.1 14.2
1936 16.9 9.9
1937 14.3 9.1
1938 19.0 12.5
1939 17.2 11.3
1940 14.6 9.5
1941 9.9 8.0
1942 4.7 4.7
1943 1.9 1.9
1944 1.2 1.2
1945 1.9 1.9
The Lebergott figures exclude employees of the WPA and other make-work projects. I prefer the Darby figures; those WPA and CCC workers were sending money home to families. Although high unemployment persisted until WWII, 18 million jobs were created in these 12 years.
But the natural tendency was fear. (Ask your grandpa what he had to do to eat in 1932 and learn the meaning of deflation and hopelessness.) Fear: In 1929 to 1932, credit was easy, but people and business were afraid to borrow and invest at any price. (People forget that FDR campaigned against Hoover because HH did not favor "hard money.') Very well, then let’s pierce the mystery, that “the War ended the Depression.”
(see the graph) GDP rose from FDR’s inauguration, through the recession of 1937, and eventually continued expanding. (The smooth curve is an average trend.) The war mobilization did not start in earnest before early 1942.
A heartfelt sentiment, to be sure, but not supported by facts. If 18 million jobs were created, and 5 million lads went into the services, a large part of employment 1932 was domestic production and defense production, not the loss of lives.
[quote]
Many people credit WWII with stabilizing the economy but any good libertarian understands destruction doesn’t create wealth – it destroys it.[/quote]
Maybe yes, and maybe no. Correct me if I am wrong, but neither the monetarist Austrians nor the Keynesians predicted the post-war expansion. Both schools believed that the depression would recur with demobilization. What the economists failed to account for was pent-up consumer demand.
[quote]DrSkeptix wrote:
What the economists failed to account for was pent-up consumer demand.
[/quote]
http://www.fff.org/freedom/1197b.asp
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So you post employment figures that can help explain how the build up to reduced unemployment? If people are being employed by the military does that not help reduce unemploymenyt – whether they are actually being killed or not? BTW, My grandpa joined the military to fight zee Germans… Not only that but many people became employed to build military equipment.
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Pent up consumer demand??? Do you mean they actually wanted to consume stuff? Is that not the general condition of every human? Whether they can actually consume or not is determined by productive capacity…what does that prove?
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You should read the pdf as well as the link I just posted it will help you with your understanding of the depression.
Good post, Dr. Do you have any unemployment #s for England, France and Canada (1933-1945)? I’ve read that employment recovered quicker in certain countries, but their productivity lagged behind the U.S.
My grandfather couldn’t find work in agriculture and eventually got a job in one of FDR’s CCC camps. With his meager salary, he was able to feed his four teenaged sisters. I find it very admirable that he “figured this out and found a way to make it happen”.
Between 1933 and 1937, GDP grew 63%, personal income increased 45.5%, and industrial output grew 5% per quarter. According to Bernanke, the countries that abandoned the gold standard the earliest recovered the earliest.
I’ve read a little Temin and Bernanke’s ‘Essays on the Great Depression’ and am as confused as ever. Bernanke is correct when he said, “To understand the Great Depression is the Holy Grail of macroeconomics.”
[quote]Jack_Dempsey wrote:
Between 1933 and 1937, GDP grew 63%, personal income increased 45.5%, and industrial output grew 5% per quarter. According to Bernanke, the countries that abandoned the gold standard – or weren’t on a gold standard – the earliest recovered the earliest.
I’ve read a little Temin and Bernanke’s ‘Essays on the Great Depression’ and am as confused as ever. Bernanke is correct when he said, “To understand the Great Depression is the Holy Grail of macroeconomics.”[/quote]
It is easy to grow an economy with borrowed (inflated) money…it still needs to be payed back. In fact borrowing or saving doesn’t guarantee increased production because there is always the chance that improper means will be chosen – what we call making a bad investment.
Bernanke would understand the GD if he chose the correct means for analysis. I can tell you he isn’t going to find it in positivism. In any case its only of historical significance and has no bearing on the future as any GOOD economist understands.
Britain was spending wildly on social welfare programs, post 1919. This caused inflation and constant runs on the Pound. Strong (Gov of our Fed) agreed with Montagu Norman (Gov of their ‘Fed’) to inflate the dollar faster than the Pound, to support the Pound. This flooded our economy with money, a lot of which went into a nice big bubbling stock market.
Then, the bubble burst…
Whenever the world’s hegemonic power falls (stops policing the globe), we have had great depressions. Britain could no longer afford to police the globe and keep up all the social welfare spending. They withdrew. With the world unpoliced, rivals for supremacy quickly arose (Germany, Italy, Japan, and so forth) and battled it out, with the USA coming to the rescue eventually.
Hillary and Barack promise to withdraw. That marks the end of the USA as the hegemon. A further sign is our allowing Chavez to pull his dirty tricks in Venezuela.
We will therefore have the greatest depression in human history. The USA is so in debt that only 4th/5th century Ancient Rome or 16th century Spain rivals our current situation. The coming depression will probably last at least 100 years with starvation, wars, riots, and total breakdown everywhere.
We are truly doomed.
[quote]LIFTICVSMAXIMVS wrote:
DrSkeptix wrote:
What the economists failed to account for was pent-up consumer demand.
http://www.fff.org/freedom/1197b.asp
-
So you post employment figures that can help explain how the build up to reduced unemployment? If people are being employed by the military does that not help reduce unemploymenyt – whether they are actually being killed or not? BTW, My grandpa joined the military to fight zee Germans… Not only that but many people became employed to build military equipment.
-
Pent up consumer demand??? Do you mean they actually wanted to consume stuff? Is that not the general condition of every human? Whether they can actually consume or not is determined by productive capacity…what does that prove?
-
You should read the pdf as well as the link I just posted it will help you with your understanding of the depression.[/quote]
In response,
I posted figures, perhaps facts, about unemployment 1932-1941. The War effort did not contribute during that period. Further, I suggested that with 5 million in uniform, and one-half-million dead, there was a change in unemployment to be sure. BUt the major change in employment–18 million new jobs–occurred because of the domestic production and mobilization for the the war, not because men were taken out of circulation. Prove me wrong.
Second, you clearly do not understand the horrible social events of the Depression. Consumption plumetted, yes, but so did birth rates, mortality, and suicide rose. Consumption, overwrought in the '20’s, was suppressed for the 13 years of 1929 to 1941, and then was further controlled and suppressed during the war years, until demobilization in 1946. Hence the Third Depression–predicted by Marxists, Keynesians, and Austrians–which never happened after WWII.
Third, you did not answer my question. There was not wage or price controls pre-war, right? It would be antithetical to the business contraction to do so. So why did you presume FDR’s enacted wage and price controls? I think you are laboring under some impressive historical misconceptions.
Last, the pdf adds nothing to my understanding of the Depression; it presents nothing new to me. That it comes from a suspect ideological website…well, I will leave that to others because I do not have the time.
[quote]Jack_Dempsey wrote:
Good post, Dr. Do you have any unemployment #s for England, France and Canada (1933-1945)? I’ve read that employment recovered quicker in certain countries, but their productivity lagged behind the U.S.
My grandfather couldn’t find work in agriculture and eventually got a job in one of FDR’s CCC camps. With his meager salary, he was able to feed his four teenaged sisters. I find it very admirable that he “figured this out and found a way to make it happen”.
Between 1933 and 1937, GDP grew 63%, personal income increased 45.5%, and industrial output grew 5% per quarter. According to Bernanke, the countries that abandoned the gold standard the earliest recovered the earliest.
I’ve read a little Temin and Bernanke’s ‘Essays on the Great Depression’ and am as confused as ever. Bernanke is correct when he said, “To understand the Great Depression is the Holy Grail of macroeconomics.”[/quote]
Your point about the gold standard is true, whether there is “cause and effect” or not. Headhunter actually–at last, to my surprise–makes a valid and true point; the US had a policy of inflating its money as a direct result of Stanley Baldwin’s disastrous re-introduction of the Gold Standard to Britain in 1924. Also, Britain experienced its recession while we were still expanding, because of these events.
And the best quote yet, is the one you site, from Bernanke.
I wonder if we need eternal and unchanging economic axioms to solve this puzzle.
[quote]DrSkeptix wrote:
I posted figures, perhaps facts, about unemployment 1932-1941. The War effort did not contribute during that period. Further, I suggested that with 5 million in uniform, and one-half-million dead, there was a change in unemployment to be sure. BUt the major change in employment–18 million new jobs–occurred because of the domestic production and mobilization for the the war, not because men were taken out of circulation. Prove me wrong.[/quote]
This is precisely my point…there had to be a build up to the war first. The dates and numbers you provide do not prove anything. There is no reason to believe that the depression wouldn’t have fixed it self had the gov’t just left everything alone.
People still need to produce and consume to survive and government intervention isn’t required for that.
FDR inflated our way out of an other depression…so what does that prove?!
Perhaps I misspoke about who did what…they were enacted by the Hoover admin after the initial Crash and kept in place by FDR. The fact still remains it hurt economic expansion more than helped it.