It’s important to study the economy of the 1930s—because those who ignore economic history are doomed to repeat it.
I thought about this when Nobel Prize-winning economist Joseph Stiglitz published work (with Bruce Greenwald) presenting statistical relationships between technological improvements in agriculture and unemployment in the 1930s. In it, he asked: What turned an otherwise normal market correction into a long, grueling depression characterized by persistent double-digit rates of unemployment?
His answer: It was, at least in part, agricultural technology causing all those workers to become displaced. Absent that, unemployment never would have skyrocketed while the U.S. job market would have maintained higher percentages of workers who worked on the farm. Surely, the economy of the 1930s as we know it never would have occurred.
So goes mainstream neoclassical research, where truth is only what can be measured and then fit into mathematical models. The problem is that these models are only as good as their assumptions, and that when real important information is not measurable, it is simply ignored.
There is abundant evidence that Stiglitz’s findings about the Great Depression reflect statistical correlations, and not causations. This is especially true since other countries made the transition from farm to manufacturing without significant employment stress. Stiglitz’s theory also lets the Hoover and Roosevelt administrations—whose disastrous interventions hindered the price system from reallocating resources as efficiently as what took place in other countries—off the hook.
Think about it. By the first half of the 20th century, there’s a surplus of agricultural output for the first time in human history. This surplus, happily, places downward pressures on food prices and increases workers’ purchasing power and choices. Then along come Hoover and FDR with policies to keep ag prices higher than they otherwise would have been, or at some level reflecting their price levels prior to the explosion in ag output. The economic results of these interventions are predictable:
• The quantity demanded of farm output falls (because prices are kept high).
• Ag unemployment skyrockets (because of reduced demand for output).
• Millions of people who would otherwise have been able to support themselves and their families working in agriculture become destitute.
• Ag surpluses resulting from the artificial (and violently enforced) price increases lead to bizarre secondary interventions requiring government to destroy food at a time when millions earned starvation wages, if any at all.
I tell this story to remember the context in which economic ideas are promulgated today. Economists such as Stiglitz are paid well to provide intellectual heft to market failure arguments that justify an expansion of the government relative to the market. So, it makes sense he would argue that technological improvements can lead to a decade-long depression at a time when many people, economists and non-economists alike, question the practicality of fiscal and monetary interventions that were unprecedented in the 1930s and unprecedented in our own time.
In the process, Stiglitz damns technology, ignoring its role in allowing mankind to emerge from solitary, poor, nasty and brutish lives. Technological improvements in the farm sector particularly caused much of the material progress in the 20th century, since they enabled the ag sector to increase productivity with fewer workers, who then moved to the cities to work in other industries—industries that hadn’t even existed 50 years earlier—and caused aggregate GDP to explode. Absent this phenomenon, there would be no middle class today.
And today, severe structural imbalances characterize western economies fed by coordinated, off-the-charts intervention in market forces, much of it justified by the pandemic. Economies are only as good as the theories undergirding them. Our hope for the future is based on good theories being rediscovered—and the rejection of many of those promulgated by court intellectuals.
Christopher Westley is dean of the Lutgert College of Business.