Bryan Caplan writes:
What was the reason for the pre-war depression anyway? A large consensus of economic historians argues, persuasively in my view, that the essential cause of the Great Depression was the international monetary contraction of the late 20's and early 30's. Milton Friedman and Anna Schwartz's A Monetary History of the United States [105] was the seminal academic work which established the magnitude and importance of the monetary contraction in the United States. Barry Eichengreen's Golden Fetters [106] largely extends Friedman and Schwartz's argument to the international economy, showing how the gold standard re-established after World War I was very shaky and wound up yielding an international monetary contraction."
Thoughts, ideas and opinions about this common explanation?
Deleveraging was not the major cause of the Great Depression, as it seems that a great amount of deleveraging (i.e. the recovery) had already taken place by mid-1930
Maybe we have different understandings of what deleveraging is exactly. When I use the word, I intend it to mean 'the paying down of debt'. This process began in the early 30's and finally bottomed out in the mid 40's.
[...] the true problem was the interventionist policies of Hoover and FDR: "Unemployment peaked at 9 percent, two months after the stock market crashed, and began drifting generally downward until it reached 6.3 percent in June 1930. That was when the federal government made its first major intervention into the economy, with the Smoot-Hawley tariff."
This is one explanation that is sometimes given, yes. However, I do not know enough about the details of this theory to comment too much. What intervention is it that you speak of specifically?
I do not have any data on the monthly unemployment stats for that period, but here is the yearly in case it is usefull:
is money some kind of lubricant that has to flow sufficiently, or else there will be a blockage in the system?
It seems to me that what drives an economy, meaning what motivates a person to increase his production, is a desire to get what he needs. Money is a convenience, but people are quick to find other ways to exchange their goods if they have to. In other words, money not flowing is at worst a symptom of something else. People are not able to find a market for their goods, is what is happening, not a lack of money flow causing a blockage.
It's not like an economy is an indoor plumbing system. Even if meant as an analogy, there has to be some logical explanation to support the analogy. Whether people spend their money or not is not due to some magical property of the money itself, or because it got clogged up somewhere, but because they don't want to spend it. Fiddling with the money supply will not solve that [except for so debasing the currency people will want to be rid of it. But that is throwing out the baby with the bath],
However, prodution cannot take place sustainably without the equal and opposite force of consumption,
Which always exists, by Say's Law.
and it is money that enables these two sides of the process to coordinate.
So a barter economy cannot function, because it has no money?
Also, money is not what co-ordinates consumption and production. For example, say 50 people in a village make all kinds of stuff, much more than they need for the 50. And there are 500 people in the village who are broke, sitting at home twiddling their thumbs. At current price levels, if we gave each of those 500 people a thousand dollars, they could buy up the surplus.
What will happen if a law is passed, giving each of the 500 a thousand dollars, either from taxes or from newly printed money or from dollars borrowed from China. They all go to the stores and buy everything. The market has cleared, as they say.
Is everything honkey dorey now? Of course not. A great disaster has occured. 500 thousand bucks worth of stuff has been consumed [=destroyed, vanished, eaten up] with no replacement in sight. That village is now impoverished.
Only if money is given to someone in return for his working and producing can the village sustain itself. Becuase that way nobody gets to consume unless he has produced an equal amount first. In such a case, money serves as an indication that he has already produced, for otherwise he would not have money.
But in a pinch, this can be done without money, Barter will do just fine.
Bottom line, what has to be co-ordinated is not supply and demand in the sense of having enough mouths to eat everything and enough food to feed them. The co-ordination has to be between the mouths, and some way of making sure that what they eat gets replenished.
Again, Say's Law explains that this is always the case, because [absent govt meddling] nobody gets the right to consume unless he has produced something to gain that right. So that Total Amount of New Consumption = Total Amount of New Production.
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But this is the thing; we don't live in a barter economy. We live in a mass-production, industrial economy with credit money. Loans cannot be repaid without money, large quantities of produced goods cannot be exchanged or bartered efficiently. If I was a manufacturer of engine pistons could I barter my output for hours of programming, or tonnes of iron ore? In theory maybe, but not in reality.
After all, what would I do with all those bartered goods? I want money so that I can reinvest with ease, and produce more pistons to acquire yet more money. This is the way the world works, and needs to work, so that allocation of resources can take place on a large scale. Without that efficient allocation, a barter economy would lead to medieval standards of living.
On the issue of Say's law, this is another area that I would like to bolster my knowledge on. Would you say that Say's law is as applicable to a credit/monetary economy as it is to a barter one?
What you say is true, of course. That money makes exchanges much much easier. But....
Let's examine these two assertions:
1. Money makes exchange easier.
2. The more money, the easier is it to exchange. Maybe there's even an equation E=kM, meaning Ease of exchange is proportional to amount of Money existing, with k some proportionality constant.
1 is true. 2 is false.
Also, once money exists, it cannot get clogged up somewhere, and no encouragement is needed to make it flow.
The short free book, What Has Govt Done to Our Money, by Rothbard explains it all.
As for Say's Law, Keynes of course hated it, because it denys everything he stood for, meaning his theory that the more you spend the healthier your economy. Since Say makes so much sense, Keynes had to go along with Karl Marx and admit its truth, but claim it doesn't apply in a money and/or capitalist economy.
Marx said a money economy creates an abundance of insane psycopaths called capitalists, whose sole interest is hoarding money, thus making Say's Law inapplicable, so he thought.
Keynes was a little subtler, claiming that a money economy is a sign of a wealthy economy. A wealthy economy means people don't have to spend all their money to get all they want, because they are wealthy, meaning they will have tons of excess money that they will just hide under their mattress. And again, claiming that hoarded money destroys Say's Law.
The two refutations I've seen of Marx and Keynes are that first of all, a very very trivial amount of money gets stashed away. What is not spent is put in a bank, meaning invested, meaning put right back into the economy. The second refutation is a corrolary of the beginning of this post, that any amount of money is enough to keep things moving. The value of the money that is not hoarded will rise, thus replacing the hoarded money.
Sources for Say's Law: The free pdf or epub file, Rothbard's History of Economic Thought, Volume 2. From page 27 on he talks about Say's Law and all the absurd rebuttals proffered against it.
Say himself, very readable: http://www.econlib.org/library/Say/sayT15.html#Bk.I,Ch.XV
Summary of Say's Law, and the various attacks on it: http://www.martinfrost.ws/htmlfiles/sayslaw.html
This link cleared a lot up for me about Say's Law. Sadly it looks like the link is down http://ryansafner.com/papers/The%20Duality%20of%20Say%27s%20Law.pdf
My good ole blog has plenty of articles about Say's Law in informal language.
The interventionist policies?
Hoover: Smoot-Hawley tariff, higher taxes, higher spending, the creation of the Federal Farm Board which set agricultural prices and restricted output.
FDR: Everything that is lumped under the heading 'The New Deal'.
@ Aristippus
For Hoover don't forget that he personally implored/commanded captains of industry in a private meeting to reduce wage-rates last out of all the costs of their businesses.
The amount of evidence on the Great Depression makes the anti-liquidationist position untenable and inexcusable.
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
I'm not sure what you mean. It was high and rising over the course of the 1920's (one decade), and high and rising over the course of 1981-2009 (three decades). Is it surprising that three decades of rising debt would see more of a rise than one decade?
Debt as a % of GDP remained fairly stable from about the mid 19th century to about 1930. It rose dramatically from that point and peaked in 1933, 4 years after the great depression already began. Kinda hard to point to this variable as the cause when it occurred after (and because GDP fell dramatically).
Next, and this was always a major problem I had with Minsky's work, what causes the private debt ratio (as a % of GDP) to rise so dramatically? Excessive appetite for risk cannot, by itself, increase the supply of loanable funds (which requires either (a) a higher savings rate or (b) monetary expansion in the capital/money markets). A higher demand for loanable funds does not automatically translate into a higher supply of loanable funds. It could just lead to higher interest rates.
The rising private debt ratio is merely one symptom of inter-temporal/monetary disequilibrium (what Austrian's focus on). It isn't, in itself at least, problematic; again, it's only a problem when it's the result of disequilibria in money/capital markets. I've also had a real problem with the Minsky's "moment," and the fact that he doesn't explain how private debt accumulation automatically leads to malinvestment. In fact, I'm not sure malinvestments can even exist in the Keynesian framework of homogeneous capital and extreme aggregation.
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