Whatever one thinks about history repeating itself generally, the case for repetition is pretty strong in economics because economic activity is by its nature cyclical. Yes, times change, and no two business cycles are ever exactly alike, but there are certainly recurring patterns and it makes great sense to try to understand what worked and what didn’t in past cycles.
Ever since late September, it has been difficult to discuss the economy in much depth without encountering simmering controversies about what did an did not work during the Great Depression. But there is a problem. As economic historian Murray Rothbard points out in his history of the Great Depression, one can never use history to prove the truth of an economic theory because one can never know what the effect of an alternative policy would have been. For example, it is clear to everyone by now that the $170 billion “stimulus” of early 2008 — the one in which we borrowed money we didn’t have in order to send checks out to middle- and lower-income taxpayers (and some non-taxpayers too, if I recall correctly) — did not return us to economic health. But is that because fiscal stimulus is the wrong policy and we never should have tried it at all, or is it because fiscal stimulus is fundamentally a good idea but we did too little of it, and should really have mailed out much bigger checks, and more of them? I think it’s the former, others think it’s the latter, and either hypothesis explains the lousy result.
If we can’t use history to verify the right hypothesis and falsify the wrong one, then we should at least be able to use history as an antidote to hubris, but I see little evidence that we do. In the 80s, when I studied economics, it was said that the economic philosophies of John Maynard Keynes were dead and we were “all monetarists now.” But as Ike Brannon and Chris Edwards wrote recently, today’s consensus policy prescription is Keynesian through and through. There are voices on the margins who argue that the government should do nothing, but for the most part the debate centers on how “large” the stimulus should be — I use the scare quotes because in reality we’re dealing with lots of negative numbers — and to a much lesser extent what the money is being spent on (or not collected from, as the case may be).
Because the Great Depression plays such a central role in today’s policy debate, reasonable minds might enjoy looking at some recent and not-so-recent books on the subject. I have previously mentioned Rothbard’s history of the era, “America’s Great Depression” (1963), an excerpt from which is available here. Rothbard focuses primarily, and almost exclusively, on economic policies and economic statistics, and in so doing he fingers lousy monetary policy as the greatest cause of the Depression and the greatest obstacle to recovery. The writing is crisp and the argument is convincing, but it is definitely aimed at people who want to know what the Depression tells us about economic policy; the reader is unlikely to come away with interesting anecdotes for the next dinner party.
By contrast, Amity Shlaes seems to have written with a broader audience in mind for her book, “The Forgotten Man: A New History of the Great Depression.” For Shlaes, the story begins with widespread intellectual fascination with the Soviet Union in the 1920s, and she examines the various New Deal initiatives as much for their political significance as for their economic effect. This book does have interesting anecdotes, but doesn’t shed nearly as much light on economic policy as Rothbard’s book. (I also have a major bone to pick either with Shlaes or with her editor, regarding the way the material is organized, but let’s not go there in this post.)
I’ve also recently heard interviews with two other authors who have tried to mine the history of the Great Depression for what it tells us about economic policy. Russ Roberts of the EconTalk podcast did both interviews, and they are still available on his website. I hesitate to say too much about the books because I have not read them, but Eric Rauchway impressed me with his very balanced view of both the failures and the successes of the New Deal, and I would expect his 2008 book, “The Great Depression and the New Deal: A Very Short Introduction,” to be very good. I highly recommend Roberts’s Dec. 1, 2008 interview with Rauchway, and I expect that at least some reasonable minds may want to read the book after listening.
Finally, the most provocative idea comes from Robert Higgs of the Independent Institute, interviewed by Roberts on Dec. 15, 2008. Most people who argue about Depression-era policies seem to me to be divided between those who believe the New Deal ended the Depression and those who believe the New Deal failed but World War II ended the Depression. Higgs seems — and again, I’m basing this only on an interview — to argue that neither the New Deal nor the war ended the Depression; instead, it was the end of government intervention and the return to normalcy that occurred in the early post-war period. The argument arises from a couple of essays Higgs wrote in the 1990s but which are revised and expanded for his 2006 collection, “Depression, War, and Cold War.” This argument makes a lot of sense to me, because in the current situation I find myself avoiding otherwise productive investments precisely because of the uncertainty created by massive government intervention. I gather from recent comments elsewhere on the blog that I am not alone. If recovery ultimately depends on people believing that they know what the rules of the game are, Higg’s thesis may be the most important for us to attend to now.