Among other things, the 2006 US election marks the end of the Republican revolution that began in 1994 when the Republicans led by Newt Gingrich gained a majority in the House of Representatives for the first time in 40 years and sought to push through the radical “Contract with America”. This can be seen not only in the Congressional results but in the defeat of a series of tax limitiation initiatives. Even in the US, the appeal of social democracy remains strong.
So, this is a good time to run my piece on Sheri Berman’s The Primacy of Politics, which was part of a Crooked Timber seminar. Mark Bahnisch has more. And the debate with Tyler Cowen over US and European economic performance continues.
I’ll leave it to others more expert on the history of European Marxism to discuss the main arguments in Sheri Berman’s book. I’ll focus on a couple of peripheral points.
First there is her observation that the system triumphant at the end of the 20th century is not capitalism but social democracy. This is obviously true in the European countries she studies, but it is clearly true more generally. Even in the US, the state plays a role in the provision of health, education and social security broadly similar to that of European welfare states, and government expenditure accounts for more than 30 per cent of GDP.
Advocates of genuine laissez-faire recognise this – hence Ayn Rand’s lament that capitalism is The Unknown Ideal. Alternatively, one can refer to welfare capitalism, the mixed economy and so on.
But the triumphalist literature of the 1990s, epitomised by Fukuyama and (several levels lower down) Thomas Friedman presented the evidence with a curious twist. These writers began with the observation that, with the collapse of communism, there was no serious alternative to the Western economic model, which they typically called capitalism. Then they tried to argue that this success implied that Western countries should change their economic model, in the direction of more free markets and so on.
The obvious fallacy is that ‘capitalism’ is being used to refer to welfare capitalism in the first part of the argument and to laissez-faire in the second. Despite its weakness, this argument proved exceptionally convincing in the late 1990s, until the collapse of the dotcom boom dented its appeal, and the emergence of big government Republicanism rendered it politically irrelevant, at least in the US.
My other point concerns Berman’s argument that Marxist dogmatism prevented most European socialist parties from providing any policy response to the Depression, the big exception being the Swedish Social Democrats. A look at the experience of the English-speaking countries suggests some grounds for scepticism.
In most of the English-speaking countries, the left (labour parties in Australia, New Zealand and the UK, the Democrats in the US, Liberals in Canada) held office for some period during the Depression. None of these parties were significantly affected by Marxism. Some were theoretically socialist and others were not, but all focused primarily on piecemeal reformism.
Despite the absence of Marxist ideological commitments, the parties that were in office at the outbreak of the Depression floundered, and were unable to produce a coherent alternative to the demand for orthodox sound money policies. The British and Australian parties split, with senior leaders defecting to the conservatives to form ‘national unity’ governments in both cases. Both parties remained in opposition throughout the 1930s. The Canadian Liberal government also lost office.
By contrast, the left governments that were elected during the Depression (the US Democrats in 1932, NZ Labour for the first time in 1935 and the Liberals also regaining office in 1935) fared much better. Given the depth of the Depression, almost any kind of Keynesian stimulus was bound to work well, and conservative resistance to welfare-state measures was ineffectual. The leaders of these governments, Roosevelt, Savage and McKenzie King remain revered figures. The same path was followed, with a delay in Australia (where the Labor party was in office from 1941 to 1949 and in Britain from 1945 to 1951).
A possible alternative analysis, then, is that the Depression created conditions under which a social-democratic response could be put forward, but that this was not a real political possibility until the bankruptcy of orthodox finance had become fully evident.
John Quiggin 
IMHO, the winning ‘system’ of government is the transparent system. Whether such a government elects to support a massive social welfare albatross or let ride the four horseman of unchecked capitalistic plunder effects its viability only to the extent the choice strengthens and/or emboldens the enemies of transparency. If you think of the most egregious transgressions of the brain trust who’ve led the United States over the past six years, they all were characterized by secrecy.
“Orthodox finance” as it stood in the early part of last century. The depression was made far deeper and longer by the perverse policies employed by the Federal Reserve at the time. They tightened monetary supply precisely at the time they should have been loosening it, apparently through a lack of understanding of the processes involved.
In such a climate, as you say, any kind of Keynesian stimulus was bound to work. But this unfortunately led to the widespread and erroneous belief (still, apparently, held by many today) that the depression was caused by a failure of capitalism and fixed by socialism, whereas in fact it was caused by ignorant monetary policies more than anything else.
I have often wondered what the world would look like today if they had got the monetary policy right during the depression.
Majorajam writes:
“If you think of the most egregious transgressions of the brain trust who’ve led the United States over the past six years, they all were characterized by secrecy.”
I’d characterise it more as autocracy rather than secrecy or transparency. The last two changes of government in Australia have surely been driven by similar things: Fraser was widely seen as autocratic, Keating became that way towards the end without the Hawke populism that humanised the de-regulation appraoch. Howard is increasingly seen that way as he punches legislation through a compliant house. It’ll be interesting to see what happens in the next election.
Proust,
Blaming the Depression on the Federal Reserve, though en vogue for reasons I would imagine Saul Bellow could put the finest point on, is a sham. In point of fact, erstwhile unprecedented land and securities speculation of the 20s, fueled by unchecked credit growth, were the culprit. These resulted in distortions of the real economy, the extent of which were directly related to the severity of the downturn (together with the profound effect mass financial ruin has on people’s behavior, e.g. the ‘hoarding’ of savings). By contrast, the reign of the Greenspan and now Bernanke Put has only put off, and in so doing exacerbated, the day of reckoning. In this case, the distortion has gone on for so long that entire trillion dollar economies are oriented toward producing tradable goods, while the US is oriented to printing IOUs. Coming soon, by the trillions annually. Sound sustainable?
Big Dave,
I don’t know about you, but over here we’re getting the distinct impression we’ve been misled, although I suppose if we continue to be so gullible, autocracy can’t be far behind.
An interesting comment I must say John. A few months back I read “The Unconcious Civilisation” by J. R. Saul and I see sone of his arguments. I do not have the book anymore, but I do remmember a comment made that before the great depression the “let the market look after itself as it is well balanced and rational etc” argument was in full swing. The great depression obviously proved that wrong. If I remmember correctly he also made the point that he had no problem with the capatalist system and the stock exchange etc, but he just did not believe that it had the divine rulebook (so to speak) under which all of a civilisation should be worked. What are your thoughts?
On a slightly different point, his book also enlightened me about this Adam Smith and his “magic hand idea” that I kept hearing about. Now, I am sure that 200 years ago Adam Smiths thoughts may have been perfectly relevant. But I find it odd that people in some professions treat it as gospel truth. Maybe they should be remminded that 150 years ago relativety and Quantum physics was still to be discovered (and these have a big influence on our everyday lives). Once again, what are your thoughts?
Australia 1890’s, Japan 1990’s and Asian Tigers late 1990’s, all good examples of the dangers of asset price bubbles that seem to suggest that while monetary policy contributed to severity of the depression it was by no means the primary cause.
Precisely.
If you don’t need to explain something well to the electorate (and crucially, aren’t required to by a demanding and inquisitive media) why would you bother?
Sorry, that was addressed to Majorajam, and thus also Big Dave.
We have had plenty of speculative bubbles inflate and burst since the 1920s without anything like the contraction of the Great Depression.
Speculation surely kicked off a recession, but it was monetary policy that created a deep and long depression.
Depositors panic, generating a run on deposits, Bank runs out of cash reserves, the Feds refuse to lend against Bank’s reasonably healthy assets, so Bank is forced to liquidate assets in a firesale to meet depositors demands for money, further depressing asset prices, so Bank can’t pay depositors, Bank defaults and closes, fueling further panic, etc.
One of the precepts of capitalism is a healthy money system. It is not the fault of capitalism if the government destroys the money system.
Sorry FDB – I’m not an economist and I’m not across the arguments over what caused the great depression. I was referring mostly to the election result and the tendency over time for Australian governments of both stripes to adopt more autocratic governance. I’d agree with you that without a properly functioning, independent fourth estate that this tendency is accelerated.
I am interested in the history leading up to the idea that a single monetary lever (interest rates) is an optimum way to run an economy – it seems to be too much of a blunt instrument when half of your country is booming and the other half is lagging. The old state stamp duties seemed much more flexible to my dim wits (cigs! Beer! Up! – I miss those headlines).
Why should a healthy economy plunge into deflation just because monetary policy was tightened? The answer is it wasn’t a healthy economy due to the actions of rational investors on a steady diet of loose money.
The Fed was pretty quick to lower interest rates once the economy entered recession. Their biggest mistake was raising interest rates when gold started leaving the country, but that was well into the slump with the root cause being a loss of confidence in the US dollar brought about by the financial crisis. I’m all for a bit of intervention but I’m not sure I favour using public money to prop up insolvent banks. I don’t call bad loans healthy assets.
Proust,
First of all, asset price bubbles from tulips to tech stocks to tin are symptoms, not causes, of malignant monetary processes. The cause is always wayward excessive credit creation. In that, total debt (all sectors) as a fraction of US GDP was higher before and during the Great Depression then it had been ever before or ever since- until today of course as it is higher (well over 3 times at last count). It was the extent of that credit creation- not seen before or since (until now)- that directly resulted in the malaise that was the Great Depression, although presumably officials could’ve handled it better. That said, the popular history of the official reaction to the Great Depression could not be more inaccurate. This digression from a paper about the Asian financial crisis is one of my favorite passages on the subject:
Surprised? I would imagine so. What the Bernanke brand of apologists criticize the 1930s Fed for is not getting out there with a fleet of helicopters for the money drop (actually, I suppose it would’ve had to’ve been bi-planes). We’ll see the fruition of their genius in due course. In the meantime, since I’ve brought up the specter of our discounting of the wisdom of our forebears, (Glass-Stegal was quaint long before the Geneva conventions), I thought I’d share with you this nugget from one of the world’s most esteemed fund managers, Jeremy Grantham:
Hope indeed.
Hardly. The money stock in the US declined by fully 1/3 from 1929 to 1933. No helicopter drops required. If the Feds had only kept the same amount of money in the system things would have been far better.
How long do you think any country’s banking system would survive if everyone decides to convert deposits into cash overnight? That’s what happened in the Depression and at the same time the Federal reserve reduced the supply of cash by 1/3.
Proust,
“Money” is a function of economic/lending activity, and in cases such as the Great Depression, the Fed’s ability to target a quantity of money is compromised. This is what’s referred to as the “liquidity trap”- where Monetary policy is neutered because as Keynes noted, you can’t push on a string (or rather, move an object tied to the end of it by doing so). The Bernanke brand of Brave New World avengers have devised a ingenious way out of this problem- or so they are convinced. The helicopter/bi-plane drop, the wonders of the printing press, etc. Whatever you want to call it, it’s the “In case speculator losses threaten financial intermediaries, break glass” of the Greenspan/Bernanke Put, (the first step of cutting rates having been insufficient to revive the patient). My riposte was intended to highlight the fact that the Fed’s responsibility for the systemic failure of the financial system lay not in their response to the stock market collapse, but to the considerable extent to which they allowed intermediaries to run amok in the 20s (wherein they failed miserably to carry out their charter). The insolvencies that transpired in the 30s were, by October 1929, preordained.
So we are saying the same thing as to the standard criticism of the 1930’s Fed, and I think you’ll find that some day soon the conventional wisdom will regard it to be as sensible as using leeches to treat hemophilia.
If the entire banking system collapses, then yes, you’re going to have to do something far more drastic to restart the economy. But it was the withholding of liquidity by the Feds in November/December of 1930 and the sharp increase in rates in 1931 after Britain went off the gold standard that caused the collapse.
Does anyone know if Bolter has been informed on Newscorp’s new position on global warming? My understanding is that Rupert (Sun God) had been reading a few back issues of Nature and checking a bookmarked favourite, johnquiggin.com and decided that his media will adopt a more conciliatory approach to Global Warming. However changes to editorial policy do take a while to reach the outer limits of the empire. No doubt that in due course the sub-editor at the Herald Sun will be have a quick chat to Bolter by the office water-cooler and explain to him what will be required in future opinion pieces.
So how do you see the differences between the Great Depression and the savings and loan debacle of around 1990 – massive failures of lending institutions which had been loose and sloppy with money, an asset valuation crunch and a run on the same institutions?
What is it, do you think, that led to this not triggering a major collapse?
2 tanners,
Simple – the Fed did not withdraw 1/3rd of the stock of money from the economy. The S&Ls had been very loose with their lending policies and the depositors, because they had deposit insurance, had been chasing only returns rather than looking at the safety of the institution. This effectively funded the “bad” S&Ls.
The upside of the deposit insurance was also there – the bad lending policies eventually had to be funded by the US Government, preventing the crisis from deepening too far.
The proximate cause, however, was the bad lending policies funded by deposit insurance with decreased regulatory oversight.
Essentially, the deregulation was botched by leaving in place one part of the regulation (deposit insurance) while removing the associated oversight by the regulators. This caused serious moral hazard, which the shonky operators took advantage of.
What saved it in the end, though, was federal government money through deposit insurance and not cutting the money supply in response.
The Fed did not withdraw a third of the money base in the 30s either, the money supply declined because the multiplier slumped as a result of the financial crisis. The rescue following the S&L farce cost an absolute bucket load.
Letting a crisis develop and then cleaning up the mess is a very expensive business, ask the Japanese.
The financial system was not critically dependent on the S&L institutions for its operation. Hence, although affected, there was no collapse. OTOH, in 1998 the Feds did think the risk of severe upheaval was great enough from the collapse of Long-Term Capital Management (LTCM) for them to essentially force a private-sector bailout. Interestingly, the firms participating in the bailout eventually broke even on the deal, suggesting that with 20/20 hindsight the Feds could probably have let the whole thing run its own course.
The whole point of the Federal Reserve was to provide liquidity in the event of a run on the banks. There were certainly some legitimate bank failures in 1930-1932, but not enough to justify a 20% contraction in economic output. For that to happen many otherwise healthy banks had to be going under. The Feds failed miserably at the only thing that really mattered: stop the dominos.
Proust and Andrew Reynolds,
Bear it in mind that the collection of scholars and central bankers who believe that the Great Depression was caused and exacerbated by the 1920’s and 30’s Fed offer no explanation of why some modest tightening of policy in 28 should have led to the biggest stock market debacle in human history (the one-day, one-off portfolio insurance driven crash of 1987 notwithstanding). They furthermore see no reason why such a meltdown should necessarily have compromised the banking system or real economy (ironic enough from people who ostensibly also believe in the innate ability of our financial system to direct resources to their most productive uses). Apparently, if only we’d abandoned the gold standard, cranked up the printing presses, warmed up the biplanes and cocked the catapults for the greatest monetary carpet bombing this side of manna from heaven, everything would’ve been A-OK.
I’m skeptical. First of all, the theoretical construct is badly lacking; most notably, it doesn’t address the real output costs of unproductive (over)investment, of which the 20’s were truly exceptional (except as compared to the here and now). Second, it’s very convenient for aspiring central bankers to ascribe to policies that politicians/political parties seeking reelection favor, and such policies require theoretical window dressing. Most importantly, this theory is totally insensitive to the costs of nurturing speculation and credit excess (talk about convenient!). In every presentation of this Fed as culprit theory, you will find a dismissive reference to the central bankers of the day: they were callous to the plight of the banking system, so it goes, the implication being their narrow-minded puritanism tore the whole thing asunder. These passing references are supposedly sufficient to convince us that there is no merit in punishing get rich quick speculation- that there is no moral dilemma in saving the economy from the speculators and the speculators from themselves. And yet here we sit, sixty years since the monetarists burst onto the scene, atop a mountain of specious claims expanding at more than three times the rate of GDP growth, and teetering at every turn. Jeremy Grantham had this to say recently on the impact of sustaining the infrastructure of leveraged speculation:
“On the other hand, one had to admire the strength of the speculative bounce in the last few days of the quarter following the hammering [in the capital markets in May of 2006]. After 20 years of Greenspan, moral hazard speculators seem to think they are immortal, and that bullets will bounce off them. Breaking this positive attitude – probably the most profound in investment history – will not be quick or easy. This is why I believed back in the teeth of the 1998-99 bubble that the next bear market would go on for years. The great bear markets always take their time, and coming off the biggest bull market ever, this bear market is likely to be very long. 2010 has always seemed like a reasonable target date for a major bear market low. Such a 10-year bear market would be compatible with other great bear markets following the peaks of 1929 and 1965 in the U.S., and 1989 in Japan.”
There is no doubt that the Fed of the 30s could’ve eased the Great Depression by going off the gold standard and accommodating ad nauseum (although the argument that it caused the downturn is akin to the argument that Archduke Ferdinand’s assassination caused WWI). More unambiguously, it could’ve eased the Great Depression by acting to stamp out the wayward financial institutions and lending practices before such pervasive speculative fervor took hold. But given that they hadn’t by the 1930’s, the question regarding what they should’ve done should be considered in regards to the trade-offs of the bad choices available to them. Their prerogative was to protect the integrity of the life-blood of the monetary system- the currency itself- a position now disdained by enlightened inflationists. As to the cost of staying in the gold standard, consider that despite all the Fed’s perceived missteps, according to very long term trend, US economic output had grown back to where it would’ve been had the Depression never happened by 1949! By contrast, it can take generations before people regain confidence in formerly debauched currencies- not to mention that hyper-inflations have an unfortunate tendency to result in social upheaval. See Latin America and Nazi Germany.
There is however no doubt whose side of the divide holds the reigns of policy in this day and age, as currency debasement is the full time occupation of huge swaths of the US and, increasingly, Anglo-sphere “labor” force. We have and continue to mass-produce IOUs in staggering proportions. China alone has closing on a trillion of USD claims whose perceived purchasing power is increasingly a figment of their imagination. Some day soon reality will set in for the Chinese and the rest of the claim holders. When it does, it goes without saying, it will also avail itself to today’s unreconstructed inflationists, their elegant fictions notwithstanding.
Majorajam, my argument is not whether the Feds could have prevented the Depression, but whether they could have eased it substantially.
I find your couterfactual intriguing: “US economic output had grown back to where it would’ve been had the Depression never happened by 1949!”. WWII had a far greater impact on the US economy than the Depression, so I am not sure that statement means a lot.
You seem like a Keynesian: aren’t all the outstanding IOUs just a sophisticated example of Keynes at work? Explanation:
The Chinese government could choose to pump-prime the Chinese economy by spending, say, US$500B on huge public works programs. But, with the inefficiency and corruption inherent in the Chinese governemnt (or any government for that matter), that would not lead to a very efficient allocation of their US$500B.
Instead, the Chinese Government can give $500B to an efficient economy like the US, and have US consumers decide how to spend that $500B by buying Chinese goods. That will also not lead to a perfectly efficient allocation of resources in China, but the allocation will be far more efficient than if the Chinese government decided how the $500B should be spent.
Now, China has not donated $500B to the US. It has lent close to $1000B. But even if you assume a 50% deflation in the US currency against the Yuan (unlikely), they’ll still be out of pocket only $500B at the end of the day.
Proust,
The arguments you’ve cited were originally and subsequently articulated by people who also contend that the Great Depression was precipitated by the Federal Reserve’s tightening of monetary policy in 1928 and then subsequent lack of accommodation. One of these is the current chairman of the Federal Reserve Board. I think it is important to consider the argument’s ideological roots in accessing its veracity, especially as they highlight the lack of attention that asset prices receive in a monetarist framework, and hence its most critical flaw.
As regards the Chinese accumulation of dollar claims, (and for that matter other Asian exporters), their rationale is to maintain the currency peg, and therefore export and job growth, and most importantly to keep the Party atop its perch without the tanks. The problem, aside from the specious nature of the claims themselves, is the accumulation is inflationary- massively so. The sterilization of the Yuan created by currency intervention is ineffective and the monetary base has exploded (not to mention the number of banks that have had to be recapitalized using central bank reserves). As a result, China is in the midst of its own speculative boom with unprecedented increases in fixed capital investment. As I see it, the ship yards, container facilities, coal fired power plants, concrete factories, steel mills, etc. that are going up 10 at a time there, will be tomorrow’s empty skyscrapers. They’ve already accumulated hundreds of billions of bad loans, USD. The writing is well and truly on the wall.
By the way, the economist I would most identify with is a Keynesian, but not Keynes himself- a Nobel laureate by the name of James Tobin. He had the drop on the paramount importance of asset prices well before his time.
Alright, but don’t lump me with the ideologues. I doubt the Feds precipitated the recession that turned into the Great Depression – bursting of an asset bubble will do that for you every time.
And as for China, when nearly everything I own says “Made in China” somewhere on it, there has to be some substance to the boom. It’s not all speculation.
Off-topic: how on earth were western governments persuaded to hand over the interest rate reins to independent authorities? I know it is for the best, but nowadays the politicians can lose elections on the back of interest rate rises over which they have no control. I know of no other case in which politicians have voluntarily granted unpopular decision making power of that magnitude to an independent authority.
Personally, I feel that Pigou was feeling his way towards at least two lines of enquiry – how to deal with market imperfections and the significance of stocks over and above what flows alone can tell us – that were derailed by the success of Keynesianism in dominating the thinking of his generation of researchers. We could use some more following up of those lines of enquiry today.