Deja Vu?

10 January 2010 at 9:05 am 4 comments

| Craig Pirrong |

Writing near to the event, in Capitalism, Socialism, and Democracy, Schumpeter argued that policy shocks, and policy uncertainty generally, lengthened the Great Depression:

The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to a new fiscal policy, the new labor legislation and a general change in the attitude of government to private enterprise all of which can, in a sense to be defined later, be distinguished from the working of the productive apparatus as such.

Since misunderstandings at this point would be especially undesirable, I wish to emphasize that the last sentence does not in itself imply either an adverse criticism of the New Deal policies or the proposition — which I do believe to be true but which I do not need right now — that policies of that type are in the long run incompatible with the effective working of the system of private enterprise. All I mean to imply is that so extensive and rapid a change in the social scene naturally affects productive performance for a time, and so much the most ardent New Dealer must and also can admit. I for one do not see how it would otherwise be possible for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery. [Emphasis in original]

Some of the specifics are different (e.g., health care legislation vs. labor legislation) but the overall thrust of Schumpeter’s analysis of the 1930s is quite applicable today. An “extensive and rapid change in the social scene” is currently in progress, and like Schumpeter, I believe that “policies of [the] type [being considered] are in the long run incompatible with the effective working of the system of private enterprise.” And even if you don’t buy into that, as Schumpeter notes, just the massive rise in uncertainty associated with this policy ferment is sufficient to impede measured economic performance because it is rational for businesses and individuals to delay investment and hiring decisions until the uncertainty is resolved.

Entry filed under: Austrian Economics, Former Guest Bloggers.

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4 Comments Add your own

  • 1. Peter Klein  |  10 January 2010 at 2:49 pm

    Great Schumpeter quote. On this subject I also highly recommend Bob Higgs’s article “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War”:

  • 2. David Chen  |  11 January 2010 at 9:29 am

    I’m skeptical and genuinely curious — is perceived uncertainty always that general, and would ‘things’, again in the general sense, be any more certain in the absence of a federal response?

  • 3. David Hoopes  |  11 January 2010 at 12:54 pm

    David Chen: The issue with uncertainty and the “federal response” is that the federal response is expected to be immense. If congress did nothing about health insurance the level of uncertainty regarding any number of macro-economic issues would be much lower. The impact of the health care legislation being worked on now on both health care and the economy is expected to be huge. Hugely good claim its advocates a huge disaster claim its detractors.

  • 4. Robert Higgs  |  13 January 2010 at 8:02 pm

    At present, the regime uncertainty is being fed not simply by the uncertainties associated with the pending health-care measure, but also by those associated with cap-and-trade and related environmental measures; a possible new war in the Middle East, most likely against Iran, which would have tremendous repercussions on the price of oil; the prospect of new or higher taxes of various sorts; government takeovers of industry and finance; expansions of Fed regulatory authority even beyond the commercial banking industry; debt management developments associated with unprecedented peacetime deficits extending far into the future, which raise the possibility of eventual default on U.S. debt; and a seeming arrogance of the ruling political class that has not been seen since the 1960s or perhaps since the 1930s. In this way, the present situation resembles the one that inspired worries during the New Deal because it moves in very important ways on many fronts at once. No wonder people feared for the durability of the “American way of life,” including the system of free enterprise, during the late 1930s. Perhaps they are arriving at a similar fear now (although, at this point, the system of free enterprise is long gone, and free enterprise exists only in the interstices entrepreneurs can burrow into).

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