"As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression, there has been a lot of debate about the lessons to be learned from the responses to the Depression in the US, most notably the various policies that made up the New Deal. There’s a lot to be learned there, but it’s also important to remember that the Depression, in the US and elsewhere, continued throughout the 1930s before being brought to an abrupt end by the outbreak of World War II.[1]
Not only did the slump end when the war began, it did not return when the war ended - a huge difference from previous major wars.[2] Instead the three decades beginning in 1940 were a period of unparalleled prosperity for developed countries, with economic growth higher and unemployment lower than at any time before or since.
What lessons can we learn from this experience?
In the immediate aftermath of the war, the lesson seemed obvious. Planning had succeeded where capitalism had failed, and more planning was needed to maintain that success. As the White Paper on Full Employment (Commonwealth of Australia 1945) put it
Despite the need for more houses, food, equipment and every other type of product, before the war not all those available for work were able to find employment or to feel a sense of security in their future. On the average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 per cent were left in unproductive idleness. By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources.
Over time, as the difficulties of planning became apparent, emphasis shifted to the idea that the war had provided a Keynesian stimulus to aggregate demand, and that, with careful management, unemployment (or inflation) due to inadequate (excessive) aggregate demand could be avoided. Thirty years of success seemed to confirm that view.
After the failure of Keynesian economic management in the 1970s, this explanation appeared less adequate, but no adequate alternative was proposed. Given the apparent success of monetary policy in stabilising output and inflation, and reducing unemployment, from 1990 onwards, the issue seemed largely academic, and given the focus of US economists on the New Deal, even academic attention to the question has been limited.
Perhaps stimulatory fiscal policy will produce a rapid and complete recovery from the current crisis, and a restoration of the postwar Keynesian orthodoxy. But given the damage that has already been done to the global financial system, and the prospect of much more to come, this is far from certain. The experience of Japan in the 1990s is not encouraging, and this crisis is far worse in important respects. Perhaps when the collapse of financial intermediation is as near-complete as it was in the Depression, a large element of central direction is needed to restore trade and ensure necessary flows of credit. In the absence of a rapid recovery, questions like this will assume increased urgency over the next year or two."
I don't agree with him on various points, but here was my main response:
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December 8th, 2008 at 3:17 am
I’m on record favoring a very grand stimulus, tax cuts, and even printing money. I also love Keynes, but more for his writing style, which means a lot to me.
Anyway, I feel differently about the knowledge we can gain from the 30s. Abstracting out the economic data can be of some slight use, but not much. The reason I believe this is that the decisions people made in the 30s were made in the context of the 30s, and that was a very different context than ours.
I’ll give you one example. I once read a bunch of books by Wyndham Lewis. I don’t remember much about them, except that he seemed to truly believe that the only choice available was between Communism or Fascism. In other words, some form of Totalitarianism. This shocked me, but, after reading his books, I was surprised to find that many people writing in the 30s made that same assumption.
Fortunately, there were wiser and better people around, millions and millions of them it turned out,including Keynes and Hayek, who understood the world better, and so we weren’t left with only those choices. But I continue to believe that the existential situation of the times people live in are more important than other people do. So that, the choices and decisions made in the 30s really can’t help us much.
Instead, what’s happening is that we’re lurching and veering in a pragmatic way towards a path that leads us out of this mess. It turns out that we’re doing so in a way more reminiscent of Keynes, so, in order to feel like we really know what we’re doing, and since Keynes helped get us out of the 30s, we’re calling upon his spirit for solace and guidance.
That’s fine with me because, as I’ve said, I love Keynes. But we’re going to get out of this mess in our own way and in our own time, and part of the process will be reading great books that help us get through these kind's of times. But there’s one thing that makes me more hopeful about this crisis, and, maybe I’m different than everybody else, but I really wouldn’t want to have been in the existential crisis of the 30s. I’ll take this one any day.