Explaining the Great Depression


Technological change.

That's it, that's all we need to explain the Great Depression and the post war boom. Innovation, technological change.

In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance.

OK, I'm slightly over-egging the argument, but only slightly.

How the Depression started doesn't change in this story. But the post war boom is explained not by what happened post war, but by what happened pre war. Those marvellous 50s and 60s, when growth just kept happening and incomes kept rising, are not to be explained by the high marginal tax rates, high levels of unionisation nor even greater government involvement in the economy. They are, instead, to be ascribed to those technological advances of the 1930s.

This is important, for all too many attribute that post war boom to the macroeconomics. To bits of Keynes, to governments doing things with interest or exchange rates, with levels of taxation. Yet if it's really just catching up with earlier technolgical innovations then the whole thing is not macro, it's microeconomics. It's all about the incentives to experiment with changes in methods and modes of production.

Further, as we can see, there's something of a lag in such things. A decade or two even. Which then gives us lessons about the stagnation of the 70s and early 80s. These weren't about the changes in macroeconomic behaviour by governments, not with that lag. No, they were about the limiting of technological change in the 50s and 60s by the ignoring of the microeconomic incentives to experiment. By those high marginal tax rates and possibly excessive unionisation of the economy.

Again, this is over-egging. But there is very much a kernel of truth in this argument: the slowdown in economic growth in the 70s and 80s wasn't because we had abandoned the heavy government involvement in the economy of the 50s and 60s. It was because of the high level of government involvement in the economy in the 50s and 60s that growth declined in the 70s and 80s.