I have been involved in a discussion with someone elsewhere about the causes of the '29 crash and subsequent depression and one of the causes which he cites is income distrubition.
His claim was that entrepeneurial error accross the economy can be explained by the sharp changes in the distrubition of income in the 20's, particularly in the late 20's that caught producers out. This sharp distrubution of income came about, so he claims, because of rapid increases in productivity from which the capital owners reaped most of the benefit. Thus we see a sharp change in the structure of demand which would catch many producers out.
Is it possible to rule this out as a possible cause of economic calamity? Obviously, an external shock to a market can lead to large scale entrepeneurial error. But this kind of shock is internal, as a result of the market's own behaviour. In otherwords, an intrinsic instability to an unhampered market.
Is it possible that an unhampered market may bring about changes to income and therefore demand so rapidly that entrepeneurs will be caught off guard in this way?
I think most people here and myself completely reject that the '29 crash was caused by a failure in the markets. The Fed was on a pseudo gold standard and had the interest rates ridiculously high... this caused alot of uncertainty and caused people to not invest eventually led to a recession.
Lets start at the beginning. The CRASH DID NOT CAUSE THE DEPRESSION!!!!! The stock market lost 50% of its value, big deal. If you talk to the dude from Fidelity Magellan Fund he will tell you the stock market has lost 25% or more of its value 5 times since 1970. The economy was functioning and people were making mutually beneficial transactions.
The REAL CAUSE: Just when the economy was slowing down, the government decided that unions should control the world. This took out wage flexibility and made US companies uncompetitive compared with foreign competitors. Then they decided to increase the value of money MAKING FOREIGN GOODS SEEM CHEAPER. So instead of calling for a re-do, the government in its infinite wisdom imposed a crushing tariff on foreign goods. This event more than any other kicked off the Depression. The European and other foreign markets had not slowed as much as the US market but US suppliers had higher costs to deal with. Then consumers could not get cheaper foreign stuff. So the slide in the economy accellerated into what is known as the Depression.
THe impact of the tariff can not be underestimated. In a series of a couple of years, US companies raised prices and could not sell goods abroad as foreign nations imposed their tariffs. At the same time consumers suddenly had no competition from higher priced US goods and just stopped buying.
Important safety tip. When running the government: DO NOT IMPOSE TARIFFS OR TRADE RESTRICTIONS!!!!
The collapse of farming in the midwest and the resulting bankruptcy of most of the major banks certainly didn't help matters any either.
And the FED going ape-*** with the money supply.
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"Even when leftists talk about discrimination and sexism, they're damn well talking about the results of the economic system" ~Neodoxy
With fiat money there is always a redistribution from the productive to the non-productive which is inherently unstable. At some point this must end. So this distribution creates an error cycle. I think you will be interested in Hulsmanns General error cycle theory.
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The whole idea that savings can cause economic depression is a proposterous Keynsian lie designed to justify government stepping in to spend people's private savings through double-barrelled confiscation: tax and inflaiton. The rich are accused of saving a higher per centage of their income more than the poor. The argument however miss the point that if the population develops a propensity to save more, the interest rates should go down in a free market place, thereby inducing entreprenuers to borrow and start new enterprises. The rich don't usually put their savings in their mattresses!
The 1929 market crash was a classic example of what happens after monetary inflation engineered by the central bank. Through almost the entire 1920's, and going back to the second half of 1910's, banks engaged in massive monetary inflation because there was the promise that the central bank (FED being founded in late 1913) would bail them out regardless what happens. A lot of business venture should never have happened if not for the overly lax money. Entrepreneurs do make mistakes; there's always a probablistic element in entreprenuership. That's why business failures are necessary part of the economy in order to correct capital misallocation. The fiat central bank system (that's what it was since 1913, not 1933, because a central bank with a promise to be always there to function as a lender of last resort is by definition a fiat money producer because it can not possibly have unlimited amount of gold to bail everyone out; a Ponzi Scheme is a Ponzi Scheme from the day its door is opened, long before the bankrun starts a few months to a few years later) introduced a systemic element to business failures as now malinvestment were taking place en masse because the fiat money system is giving the misleading price signal. Then monetary policies took a 180 degree turn . . . the sudden tightening caused a lot of questionable businesses to fail simultaneously. What made the situation worse subsequently was wrong-headed fiscal policies by the government: instead of allowing wage levels to follow the goods price levels in a monetary tightening, the government tried every which way to artificially jack up real wages: high taxes to fund public works programs, labor unions and high import tariffs . . . all of which of course meant destruction of capital. Real wages could not be sustained while capital was being actively destroyed as capital is the root cause for productivity increases. All the government policies made what would have been a severe recession brought on by bad monetary policies into a terrible depression.
Let me get this straight:
1. Labor productivity rose.
2. Capitalists reaped most of the rewards from rising productivity.
3. The capitalists therefore had a greater share of demand, which they did not expect.
4. An internal calculation error destroyed the economy.
This is problematic. Labor productivity mainly rises from an increase in capital, meaning the capitalists, all things being equal, had the rights to the rewards of rising productivity. But if capitalists have a higher income from selling goods more productively, then two things might happen: 1) The capitalists compete prices down to make up for the higher productivity, or 2) The capitalists lay off workers and maintain prices, increasing profit. The only one that remotely leads to a recession is 2, and the occurrence of 2 is highly unlikely because it would be too easy for another capitalist to hire workers and produce goods for a cheaper price. A free market should not result in 2 and shoult result in 1. The posts above make better cases as for the cause of an economic depression than higher productivity (lol?).
Fried Egg:because of rapid increases in productivity from which the capital owners reaped most of the benefit.
What was the cause of the increase in productivity? I've heard this argument before and in that instance the productivity was attributed to the advent of the telephone. But there was no decade long twenty-five percent unemployment depression resulting from the steam engine, the railroad, or the computer.
Fried Egg:Is it possible that an unhampered market may bring about changes to income and therefore demand so rapidly that entrepeneurs will be caught off guard in this way?
It doesn't make sense. The only way that income disparity could even be remotely plausible is if economic expansion has caused the poor to get poorer, I doubt even that person argues that.
Sure, you can imagine all types of hypotheticals that could cause "market failure" but none of them are accurate descriptions of how markets work.
Your friend is trying to use a negative proof.
Peace
Thanks for all your responses. I have another question though.
Jared :This is problematic. Labor productivity mainly rises from an increase in capital, meaning the capitalists, all things being equal, had the rights to the rewards of rising productivity. But if capitalists have a higher income from selling goods more productively, then two things might happen: 1) The capitalists compete prices down to make up for the higher productivity, or 2) The capitalists lay off workers and maintain prices, increasing profit.
Is there not a third option? How about the company's increase in productivity leads to an increased output? Output increasing but with a view to supplying the market with it's old demand structure. The new demand structure demands more luxury goods and less of the basics because it is the rich who have the increased purchasing power. If the shape of the demand structure changes rapidly enough, it would probably catch a lot of entrepeneurs out, would it not?