Archive for September 9, 2009

Don’t count on a replay of the Great Depression…

September 9, 2009 Leave a comment

We are trying to figure out what of the criticism we leveled at Paul Krugman is relevant, and what is not.

Krugman’s article raised two important points:

  1. Schumpeter was not some flat earther who believed in a stable, steady state theory of capitalist markets. He believed, based on what I have read of his works – a tiny. perhaps, unrepresentative fraction – both that markets were prone to sudden and even violent dislocations, and had a definite trajectory toward ultimate collapse. The former, at least, driven by technological change. Perhaps the latter as well. He also seemed to believe these two tendencies were not exceptional cases, needing to be explained or accounted for separately from a description of how capitalism worked, but had to be accounted for in the description of the capitalist market itself. The fact that even the most rudimentary examination of his work reveals how different his ideas were from how he is presented by Krugman is telling.
  2. The same conclusion applies to how Krugman treats Lord John Maynard Keynes. I have not been a fan of his, and only came to understand his work based on tutoring by Tom Walker. I had absorbed much of what I knew of his theories from reading the post-war American interpretation. That interpretation, which, apparently, Krugman has swallowed whole cloth, calls for government intervention to stabilize the economy through fiscal and monetary policy tools. It completely neglects Keynes’ comments that shorter working time is the long term solution to the problems arising from the depression. However, it is one thing for me to fall victim to this misunderstanding, it is quite another for Krugman – who fancies himself as a follower of Keynes – to spout the same one-sided interpretation.


schumpeterSchumpeter’s main criticism of the steps taken by the Federal Reserve and the Roosevelt administration during the Great Depression was simple: the Great Depression, however, difficult, was a necessary adjustment to the changes which had taken place in the economy over several decades – changes which had virtually transformed the economic landscape, and increased the productive power of labor beyond anything imagined up until that time.

To cope with those changes, a number of measure had been taken, some of which were necessary – relief for the unemployed – some of which only served to intensify the crisis – protectionism, the replacement of gold by fiat money, and the imposition on Germany of the costs of World War I – some of which were called for, but vulnerable to charges they undermined economic activity – the Glass-Steagall Act (which ultimately was undone by the Clinton administration) comes to mind.

And then there were those measures specifically designed to prevent the economy from adjusting to the new economic reality of less work: the Keynes inspired government intervention, using its fiscal and monetary powers to promote an inflationary expansion of the working time.

Tom Walker has pointed out recently that, based on the available evidence, at least one author of the history of working time, Benjamin K. Hunnicutt, believed the Roosevelt administration undertook the latter set of policies specifically to avoid reducing the work week as proposed by the Black-Connery 30 hours legislation:

It is true that Ben Hunnicutt doesn’t see the New Deal programs as a conspiracy. What he does say, though, is that the only real coherence to the programs was the intent to defeat the Black Bill. Or, to soften that somewhat he attributes the view to a few of his sources (Keyserling and Connery) without directly disputing it. Whether or not one calls an intentional program a conspiracy depends, technically speaking, on its legality and secrecy.

“In a letter to Arthur Schlesinger dated April 9, 1958, Leon Keyserling stressed that Roosevelt came to Washington without a “systematic economic program.” The “highly experimental, improvised and inconsistent” programs of the first New Deal defy categorization. They were the products of “schools of reformers” that had been promoting diverse programs that Roosevelt, higgledy-piggledy, picked up.

“According to Keyserling, the PWA, CWA, NIRA, and the rest were not parts of any systematic plan or overall purpose. The only coherence given these events came from outside the administration. It was the “desire to get rid of the Black bill” that prompted the administration to draw up such things as the NRA, “to put in something to satisfy labor.” This same point was made by other notables in Roosevelt’s administration, among them Raymond Moley.

“Throughout the depression, 30-hour legislation goaded Roosevelt to action. The Black-Connery bill, introduced in each depression Congress until passed in highly modified form as the Fair Labor Standards Act [FLSA] in 1938, with all the work-sharing teeth pulled, continued to function as a sort of reverse polestar, enabling Roosevelt to chart his course by the simple expedient of sailing in the opposite direction.

Roosevelt’s instinctive reaction against 30 hours matured to positive approaches to industrial stabilization and reemployment. They were built on work creation, not work spreading, founded on industrial growth and increased spending as the wellsprings of progress. In the process, he and his administration discarded the century-old notion that work reduction had the potential for social and individual advancement.

“From the point of view of someone like Representative William Connery, who pushed for 30 hours from 1932 to 1937, the New Deal had a coherence, a reason for happening when and as it did, that was lost on others not so positioned. From Connery’s perspective, the New Deal was what it was because of its opposition to 30 hours. — Hunnicutt, Work Without End, pp.248-49″

The relevance of Schumpeter’s observation to the present crisis is compelling. If he is correct, what we are witnessing is not simply a replay of the Great Depression, but of the Great Depression PLUS all the accumulated changes to global economy which have taken place since that time.

But to this balance of adjustment which must be accounted for in this crisis, we should add all the imbalances that have built up over that time, and, which resulted from seven decades of government intervention to forestall the adjustment to all the economic changes over that entire period.

Says Schumpeter:

For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. Particularly our story provides a presumption against remedial measures which work through money and credit. For the trouble in fundamentally not with money and credit, and policies of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future.


john-maynard-keynesBy contrast Keynes believed there was a role for just the kind of monetary and fiscal intervention that Schumpeter wanted to avoid.

The problem, from Krugman’s perspective, is that he saw this as a strictly limited intervention, with clear limited aim, and further limited in duration.

The blog, Econospeak, has reproduced his ideas on this in full, of which we excerpt the relevant portion:

4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.

In Keynes’ view, in other words, following World War II there would be a period of rationing while the economy recovered; a period where economic policy would be to encourage some additional investment to bring the economy up to its potential; and a period where, in his words, It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.”

Keynes estimated that it would take some 10 to fifteen years after the war ended to get to the point where working time would have to be reduced in order to discourage saving and prevent unnecessary and wasteful over-investment – what we would call a bubble today.

The war ended in 1945, which would have put the ideal time to begin reducing hours of work at around 1960 at the latest.

If we double Keynes’ off the cuff estimate, just to be conservative – to thirty years, rather than fifteen – we are in the middle of the stagflation of the 1970s, which brought about the collapse of the Keynesian Revolution in economics.


It is impossible to say with precision how this insanity will unfolds over the next period, but we believe any comparison to the Great Depression completely underestimates the degree of adjustment that must impose itself on the global economy to account for unfinished adjustments of the Great Depression, the accumulated changes since then, and the perversities introduced into what Schumpeter called the economic organism in the seven decades since World War II, which have resulted in one after another bubble.

This triple threat is now aimed at the survival of millions of working families in this country, and billions more beyond.

The management of this crisis is now in the hands of the very men and women who failed so miserably to avoid it. It really is not clear that it can be managed even in the best of circumstances, but it is obvious that the first step in that process is to remove those who made it inevitable by prolonging the very policies that made it inevitable – this is now a political catastrophe.