In the Paul Krugman column which Israel Curtis posted about yesterday, our generation’s second coming of Keynes shows just how thoroughly he embraces what Ludwig von Mises called the “Inflationist View of History” by espousing the ridiculous notion that the late 19th century, a time of unprecedented economic growth, was dominated by a “Long Depression”.
Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
If only what is in store from us were similar to the economic growth of the late 19th century!
Murray Rothbard debunks the “Long Depression” myth in his History of Money and Banking in the United States (available from Mises.org in hardcover and as a free PDF download):
Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction. It should be clear, then, that the “great depression” of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.
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To the extent that there were economic problems in the 1870s, they were the direct result of (a) the bubble created by massive state-subsidies in railroads, canals, docks (i.e., “internal improvements”), and (b) monetary manipulations culminating in the demonetization of silver.
In other words, not substantially different from today, where the economic decline is the direct result of (a) the bubble created by massive state-subsidies of house-building and (b) monetary manipulations (although monetary manipulations are easier to accomplish today, what with the Fed and the use of electronic “money” and all).
What surprises me is that Murray Rothbard’s view on the Long Depression is not Austrian. The period as one of growth (at least, after 1879) is accepted by Friedman and Schwartz, as well as by scholars such as Christina Romer.
So there’s an agreement between different schools about a broad point of fact. That doesn’t make the position “non-Austrian” anymore than would Rothbard agreeing with Friedman about mercantalist restrictions on trade harming the late colonial American economy be “non-Austrian”.
I think JFC simply means there’s nothing particularly Austrian to Rothbard’s view here, eg, nothing for Krugman to strawman-bash.
I think Krugman would accept that challenge.
I am not so sure. He cannot stomp out every spark of truth.
The reason Rothbard’s position is not Austrian is that he’s violating Austrian methodology and principles.
Of course he did that routinely…but in this case, he does it by using the same meaningless metrics that he decries elsewhere. In fact, he uses an even more irrelevant, convoluted statistical maze than his opponents often do. The Austrian position is that real-world experience trumps such academic nitwittery.
For example, he ignores 14% unemployment and the failure of tens of thousands of businesses, in order to claim that things were great because you can make economic numbers look bigger by multiplying them against the deflation that was CAUSING the unemployment, bank runs, and bankruptcies.
Rothbard, unlike real Austrians like Hayek, made the ridiculous claim that deflation was magically good, even though it has exactly the same pricing distortion impact as inflation, causes the same destructive malinvestment, just in the opposite direction.
Hayek gets it right, here:
“On the first issue — whether to use one’s money or whether to hoard it — there is no important difference between us. It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.” — http://butnowyouknow.wordpress.com/those-who-fail-to-learn-from-history/hayeks-1932-letter-on-the-great-depression/
Hayek was saying that before Rothbard’s time, of course…back when “nobody” was confused enough to think deflation desirable.
Sadly, Rothbard became an advocate of deflation, though he barely seemed to even understand what it was.
Therefore, he takes the devastating fact of runaway deflation, and simply uses it to boost numbers that ignore human action and motivation, like an ivory tower academic.
Have you read this paper by JGH?
http://mises.org/books/deflationandliberty.pdf
“In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates
anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false)
elites, whereas deflation means open redistribution through bankruptcy according to the law.”
Austrian School of Austrian Economics academic William L. Anderson keeps a great blog, Krugman-in-Wonderland, critiquing Krugman’s various writings and speeches as he is making them:
http://krugman-in-wonderland.blogspot.com/
Meh. The West continued to grow throughout the 1930s too.
The 1930s saw real wage growth for the employed, but not for the unemployed. Overall there was not real wage growth in the 1930s.
If you are talking about GNP then it’s true it did grow in many of those years, but this is why no one should respect GNP as a measure of real wealth. In WWII GNP was also very high, but all those tanks didn’t mean a great deal for the individual consumer who got much less.
The employed saw real wage growth. The unemployed did not. Wow! Some insight.
Unless the unemployed saw NEGATIVE wage growth, on average there was wage growth. But, if by ‘overall’ you mean not EVERYONE (employed or not) saw wage growth, then yes I think we’d all agree.
I never implied that I had special insight here. I was making the point that GDP growth does not mean people were better off. While some people’s wages were kept artificially high by Hoovers and Roosevelts price control agreements & legislation they destroyed the entire wage of those laid off and who could not get hired because of those same controls.
I don’t know how you question “unless the unemployed saw negative wage growth.” Did not their wages by virtue of being unemployed in many cases “grow negatively” by -100% (or in cases of welfare payments some other figure certainly less than their original wage?)
What is “meh” is your comment. You don’t define growth, and you make no connection to Rothbard’s array of points. Did you actually read the post?
Also, “meh” is not a word.
Of course it is.
“This will look like the ‘Long Depression’ of the late 1800s”
You mean nominal wages will rise while prices fall, leading to outstanding gains in real wages combined with low unemployment? I wish. IMHO, this will look more like the stagflation of the 1970s.
Also, how does agreeing with Friedman and Schwartz on the status of the economy during the “Long Depression” count as “non-Austrian”? I’m sure Austrians also agree with monetarists (and even Keynesians) that the sky is blue, 2+2=4, and that mutually contradictory statements cannot both be true (well, OK, the Keynesians might dispute the last two, but still…)
La dépression est une maladie qui se soigne, notamment grâce à des antidépresseurs et une psychothérapie. Beaucoup croient faussement qu’il faut choisir entre l’un et l’autre.
Those that reasonably wonder if the information in the article is complete (instead of slanted to include some facts and not others….) will find just the wiki article very informative.
For instance, from Milton Friedman:
“Figures from Milton Friedman and Anna Schwartz show net national product increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame.[22] However, since between 1869 and 1879 the population of the United States increased by over seventeen and one-half percent,[23] per capita NNP growth was lower.”
etc.
This is a great example of how ideology (such as on this site) reduces the ability to accurately perceive reality.
That’s a high price to pay for consistency!
The scary thing about the wikipedia article you talk about is that it was full of passages plagiarized directly from Rothbard’s book…and worse, stated as if fact, instead of Rothbard’s anomalous opinion, not even supported by other Austrians.
Vorpal,
“Rothbard, unlike real Austrians like Hayek, made the ridiculous claim that deflation was magically good, even though it has exactly the same pricing distortion impact as inflation, causes the same destructive malinvestment, just in the opposite direction.:
Nonsense. He said that deflation does not mean stagnation, as monetarists and Keynesians believe, but that it represents a natural consequence of increasing productivity in the gold standard regime. Both Mises and Hayek rejected the monetarist theory of stable prices which you wrongly ascribe to the Austrians. The doctrine you like was developed by Irving Fisher and revamped by Milton Friedman, not by the Austrians. Hayek explicitly and repeatedly criticized the doctrine of price stability. Read his Nobel Prize speech. Read Prices and Production. It’s all over the place. Even Schumpeter thought that the inner working of economic system to liquidate the malinvestment must not be subverted during the recession by the misguided inflationist policies of “price stabilization”. Hayek says the same thing in Prices and Production. Mises explicitly says that every quantity of money is equally good and that recession means recovery.
I hope that you would not find George Selgin a “Rothbardian”, who argues in his book “Less than zero” that the growth deflation is a very good thing, and actually represents a normal occurrence in a healthy economy.
Apart from all of this, there is a general theoretical problem: what is “deflation”? Keynesians and monetarists would say that deflation represents a general fall in price level. The Austrians define deflation as a decrease in the quantity of money. What do you mean by deflation? in the 19th century,a s Rothbard shows, there has not been any deflation in the Autrian sense.
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