Throughout the time period of the Great Depression, a battle of economic theory was being waged in the US. The liquidationists like Lionel Robbins and his 1934 Treatise on the Great Depression, believed that government intervention into the economy would only prolong issues of mal-investment, and stifle the organic economic growth of the private sector.
On the other side of the coin, you had Keynes and his proponents who argued that an extremely loose federal fiscal policy, driving money into the economy was the only way out. Without massive government stimulus, business would never again hire more workers. Truly a bold claim.
The economic academia of today, actually argues that the great depression was prolonged due to FDR’s insistence on balancing the federal budget. They contend, if he had embraced a larger fiscal stimulus through deficit spending, the length and depth of the Great Depression would have been far less.
This may very well be true. I am not one to argue that hair of the dog wouldn’t stave off the painful head tremors of the morning after a wild party.
We know that the Great Depression was initially brought on by a great monetary expansion, which stimulated a bubble of mal-investment that the market naturally opted to liquidate. Just as the wild party undoubtedly leads to a hangover the following morning, so does the artificial expansion of the money supply. Surely the immediate effects of the unavoidable painful recovery can only be postponed.
But the question here is not to decide whether a second wild party is a sound way of dealing with the ramifications of the first. Certainly, history has already been written and the consequences are all around us. Let’s focus more closely on the Keynesian argument that fiscal stimulus was necessary to stimulate economic recovery.
As we’ve discussed before, by the Fed’s own admission, periods of low unemployment correlate with upcoming recessions. But why?
If the Keynesian rhetoric is to be believed, then surely low unemployment would be a sign of great strength in an economy.
We know this is simply untrue. Not just because of the trends of recessionary periods around low unemployment, but also because of the nature of labor. Would profit incentives cease after a period of liquidation? Had mankind survived until the year of 1929 out of dumb luck, without a benevolent federal government to guide its action?
The profit of a laborer is where technological inefficiencies are met with human capital. Entrepreneurs are incentivized by the feedback mechanisms of profit and competition in the marketplace, to provide the same goods and services for less. To do this, they must increase efficiency by targeting the greatest costs to production.
If full employment were the utopia, then surely that end could be achieved tomorrow. By putting every man, woman, and child to work on their hands and knees in the fields and eliminating those pesky tools of convenience that increase productivity and eliminate the need for surplus human capital, we could achieve the utopia.
But the pragmatic thinker knows that this is not progress. The rational among us can conclude that technology (and its subsequent deflationary effects) can only ever improve our lot in life by granting us cheaper access to a higher quality of goods and services.
The debates surrounding the historical impacts of government intervention during the New Deal have shaped our modern schools of economic academia. But we should stop and ask the question, to what ends do they strive?
Book of the Month:
The Ethics of Money Production by Jorg Guido Huulsman
“The potential abuse of substitutes is a very considerable disadvantage. One may therefore justly doubt that on a free market they could have gained any larger circulation”
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