Megan McArdle has been wading into the debate over how much we should credit the fiscal stimulus component of the New Deal for ending the Great Depression.
In the first of her articles, she makes a very interesting point:
There are a whole lot of theories out there, but with an “n” of 1, no overwhelming evidence in favor of any of them.
There *was* only one Great Depression of the 1930s, so it’s hard to draw conclusions from it. If you only have a single data point, you can draw an infinite number of lines through it, and you can draw infinitely many more curve through it.
But we actually have three data points. The Great Depression of the 1930s is the best-remembered depression, but there have been many more depressions in American history, two of which (the Panic of 1837 and the Long Depression) rival the Great Depression for severity.
The Panic of 1837 started following a financial crisis in which equity markets crashed and large numbers of banks failed. The crisis in turn was triggered by Andrew Jackson dissolving the Bank of the United States and ordering the Treasury to accept payment only in gold and silver coins, accompanied by the collapse of a speculative bubble in western land. It ended a year or so after the Tariff of 1842 was passed. The tariff was the only government response to this depression. We’ll come back later to the question of whether the recovery was because of or despite of the tariff.
The Long Depression also started following a financial panic. This panic was triggered by the collapse of a speculative bubble in railroads and by a sudden contraction in the money supply (following the retirement of debts and fiat currencies issued to finance the Civil War in America and the Franco-Prussion War in Europe and a standardization on gold-backed currency during a time when gold was scarce). Like the Great Depression and the Panic of 1837, the Long Depression was characterized by deep unemployment. Unlike them, it was not characterized by a sustained decline in GDP. Looking at unemployment numbers, the Long Depression lasted 23 years (hence the name), but output started recovering almost immediately. Unemployment ended at the same time the monetary supply started growing fast enough to keep prices stable as output increased, due to the South African gold rush and the discovery of the cyanide process for refining marginal gold ores.
The Great Depression had dozens of proposed causes and cures. Like the other two depressions, it was triggered by a financial panic and the collapse of a speculative bubble. There was also a massive contraction of the money supply, although this took place on the way down after the panic started rather than preceding the panic. It bottomed out in 1933, concurrent with the start of the New Deal (which ended the monetary contraction by devaluing the currency, contained a fiscal stimulus that was moderate by modern standard but enormous by the standards of the day, and contained a great many other measures). Output started to recover then, but unemployment didn’t recover until World War II started and the entire production capacity of the economy was focused on war material (this involved a mostrously large deficit, an unprecedented monetary expansion, and drafting everyone who wasn’t employed in a war industry into the military).
Through these three, I see several common threads in the causes: the collapse of a speculative bubble, a monetary contraction, and a wave of asset devaluations and bank failures. It’s unsuprising that these cluster, since they feed back into each other. The Panic of 2008 had a bubble collapse, a wave of asset devaluations, and a wave of bank failures (but the last was mild compared to the three depressions, or even compared to some post-WW2 recession), but because Helicopter Ben ran the Federal Reserve’s printing presses at full speed to keep prices stable despite the financial panic, there was no monetary contraction — M0 (the number of dollars in existance) is way up, and M1/M2 (the total value of everyone’s dollar-denominated bank accounts) are stable.
The only common thread I see in the ending of the depressions is a combination of time and monetary expansion. In the Panic of 1837, the economy found a new equilibreum as the banking industry gradually recovered. The Tariff of 1842 is sometimes credited for the recovery, but if so it’s not a general solution to depressions: the largest tariff in American history was passed early in the Great Depression and is generally considered to have made things worse. The Long Depression is the cleanest example, with a monetary expansion being the only candidate other than time for triggering the recovery. And the Great Depression had many things that could have ended it, but time and monetary expansion were the only things that were present in all three recoveries.
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Great post!
I suspect that we know a lot more today than we did 50 or 100 or 200 years ago about economics, but in many ways it seems like the science is still in its infancy.
It may always seem that way, Dean, because as a social science, it is hardly a science at all. Remember, I’m an “econ” major. Economics has the lure of using mathematical and statistical tools to measure phenomena that themselves appear to be quantitative. So arguably it is the “science” of measuring certain kinds of human behavior that is amenable to quantitative measurement.
On the microeconomic level — which ironically tends to be less quantitative — the predictive power of economic theory is, I think, pretty good. But it seems that when it comes to comprehending large economies or even sectors of them, it’s a lot weaker. If the reason is that there are too many variables for the darned thing to work, then maybe someday it will work because we’ll figure out how to stuff all the data into it.
But it’s equally possible that economics is not really a science at all but a paradigm of analysis that uses statistical tools to quantify behavior and tries to apply that to what are fundamentally sociological, psychological or other phenomena not really amenable to the sort of predictive certainty we expect of a science at all.
Then there’ some third possibility, you’d think. I don’t know that it would be. Assume a can opener.
I took economics in college. Granted it was a low-level course (I think I had to take 101 and 102). But in the class they were using calculus to derive some equations. The actual equation they were trying to integrate had a discontinuity in the function and they were integrating across the discontinuity.
I raised my hand and pointed out that an integral over a discontinuity in a function was, by definition, undefined, and as such the result was no better than a wild guess.
The professor insisted that the result was valid because the discontinuity “was not important.”
I told the class, “I don’t care what you guys do with this information, but you need to know that what this class is doing is misrepresenting itself as a “science” when it is refusing to adhere to the rigor that defines “science” itself. You need to know that this “proof” is nothing more than speculation on the part of the economists who have derived this equation.”
I still made a “B” in the class.
Uh, what college was this at, exactly?
It’s common to suggest that social sciences are not real sciences, but I think that flies in the face of social science that has turned in extremely good predictions. The most obviously successful of these is polling. It is extremely accurate when done properly. Also it’s also easy to do wrongly, either through ignorance or willful intent to spin the data.
The same is true of the social sciences; when we can quantify certain things about a large population–and I don’t think most people who’ve really looked at it would disagree–then you’ve got something solid there.
There is much in economics that’s proven wildly successful. We can quantify all sorts of things by looking at a nation’s GDP, PPP, and quite a lot of other things that economists gave us.
Every science also has bleeding edges where nobody quite understands what’s going on. Einstein’s theories are incomplete (if not outright wrong) in some important areas. Biologists still don’t have a full handle on what drives evolution besides natural selection and random mutation (although some will burst into mouth-foaming fury if you say that–I know, it’s happened to me a few times). There are still physicists who think much of quantum theory is illusory. Astronomers and cosmologists still have only a dim understanding of certain objects. And so on.
So while I think it’s fair to criticize any of the social sciences as having certain innate problems, that doesn’t make social science Not Science. At least, not if you ask me.
Dean:
My problem with economics is not whether they call it a “science” or not. Heck they call Psychology a “science.” Insofar as “science” means “applying the scientific method” then dog training can be a “science.”
My problem with economics is that they twist mathematics around to make it fit their preconceived notions and then teach it to impressionable kids as if their suppositions were “proven” in the pure mathematical sense. Since most students seem to assume the instructor and textbook are TRUE, this bothers me.
It does not require calculus to be a science. But if you are going to INVOKE calculus in an attempt to provide CREDIBILITY for your “science” then it strikes me as completely dishonest to not apply mathematics rigorously according to mathematical rules.
That’s my gripe. And it’s not restricted to economics. I think this is rampant in all the politicalized “sciences” from economics to global warming.
Well, but psychology *is* a science. At least, some significant psychological research is quite vigorous. The problem is that the field is so “soft” that sometimes rigorous and objective analysis gets set aside for the latest fads. But, you know, what BF Skinner did was valid science. Psychologists have turned in some very significant scientific research and predictions.
You’re painting too broad a brush on economics is all I’m saying, Sean. You had one or two entry-level classes. Unless your teacher had a PhD in economics, you can’t really be sure you just didn’t have someone with a Master’s degree in some related field. You might have also just gotten an idiot with a PhD–there are a depressing number out there.
One of the things I hated so much about the college experience (I graduated, but barely alive, I hated every fucking second of all four+ miserable years. But I disgress.) was teachers who thought that being “right” was more important than making sure students had the straight dope with no bullshit.
One of the things I noticed was how often teachers would get things wrong in college. You can, I suppose, infer from that that I’m so arrogant I just always argue with teachers. There’s no way I can prove or disprove that; obviously no one is entirely objective about themselves. Yet I rarely got into fights with my teachers, only once got into any serious disagreement about any academic matter (and maybe a few other arguments over a grade here or there). Mostly I made it my habit of quietly raising objections but if the teacher would have none of it I’d just shut up; I was there to get the stupid piece of paper, not argue with teachers.
More than once on a matter, I was able to quietly send a polite email to a teacher where I thought they’d made a mistake in class. Sometimes they blew me off, sometimes they made lame excuses which indicated to me that they were too proud to just say “whoops, you’re right, I blew that one didn’t I?” (we all do these things, I trust a teacher more who says that than any teacher who fulminates about how much more knowledgeable they are than me). Most of the time, the teachers were for real and would just do the right thing and say, “you know, you’re right.” Or, even better: “you know, I can see where you’re coming from, but here’s what I think you might be missing.”
I think if your Econ teacher were smarter, he’d have just said, “hmm, come grab me after class and let’s discuss this, you may have an interesting point there but I need to think about it and we need to get through this lesson.”
Good teachers do that.
So, rambling on: don’t read too much into one teacher’s foolishness. Heck, he may have even just been having a bad day and didn’t realize he was spouting babble even though he was.
lol who said you couldn’t integrate over discontinuities?
I too studied economics, at the University of Illinois at the old Chicago Undergraduate Division at Navy Pier during the late 1950s, before I moved downstate to Champaign-Urbana to finish my undergraduate degree. My economics studies included an interesting semester studying the Federal Reserve system.
But my real education in economics was as a small child in Chicago in the late 1930s, witnessing effects of the very real national depression –the depression to end all depressions. There were signs of it’s effects every around the city, in an era when much of the viable employment was in federally controlled public works projects such as those of the WPA (Works Progress Administration). The coming of World War II in September 1939 was the main factor that ended the Great Depression.
Now, late in my life, I see signs that we may be in yet another Great Depression. But this time, there is no world war on the horizon. And even if there were such a phenomenon, the USA would not be mobilizing 50-100 thousand large and small factories to turn us into a 21st century “arsenal of democracy”, and they would not be enlisting or conscripting another 16 million young american men and women into the uniformed armed forces.
So this Great Depression II — if it turns out that way — may be around for a long time. And when world oil production begins its terminal peak some time between 2012 and 2018, as predicted by a number of petroleum geologists and energy industry economics, our economy and that of the rest of the developed world will be in deep shit without toilet paper.
Arnold Harris
Mount Horeb WI
Arnold, what are the parallels you see between the Great Depression and the present economic situation that make the latter look more like the former and less like, say, the 1982 recession?
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