Causes of the Great Depression
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The Great Depression was a worldwide economic downturn beginning in the late 1920s and ending with the beginning of World War II in Europe. Finding the causes of the Great Depression, the largest during the period of economic record keeping that starts in the mid-19th century, has been called "the Holy Grail" of economics. Several theories have been advocated to describe the emergence of the Great Depression and many others formulated in the decades since its occurrence.
In general, theories of the Great Depression can be classified into three groups: orthodox classical liberal, Keynesianism, and neoclassical economics, which focuses on the macroeconomic effects of money supply including production and consumption, Marxist economics, which argues that the root causes of the Depression are based in the fundamental production relationships of capitalism, and heterodox theories which argue that the Great Depression was caused by cyclical factors reaching a particularly acute point during the 1930s.
All of these theories were prominent at the time and guided different policy responses, thus even theories, which are no longer widely accepted, are documented and studied, if for no other reason than to examine why some of these theories failed so badly to cope with the economic stresses of the time.
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Orthodox economics
The observed story of the Great Depression—a deflationary spiral that forced dramatic falls in asset and commodity prices, dramatic drops in demand and access to credit, as well as disruption of trade—has not largely changed since study of the period began. The question has always been what were the causes, and how did the factors interrelate. Which government policies created it? Which ones improved the recovery or slowed the expansion? Was the Great Depression predictable and preventable? On the other hand, was it the inevitable aftereffect of decisions outside of the purely economic realm? Broadly speaking there are those in mainstream economics who hold that deflation caused contraction, and those that hold that contraction caused deflation. In addition, in the recovery, there are those who hold that the recovery required stimulus—that is demand from the government, which finally arrived in the form of the Second World War, and those that hold that it was structural distortions in the economy, primarily caused by government, that held back the recovery.
While it might seem that ideology would play a preference in which theory an individual subscribes to, this is not entirely the case. While conservative economists tend to minimize or blame the New Deal, and liberal economists tend to praise or at least condone it, the range of policy responses across the industrialized world was so complex that clear attempts to blame some particular government have not shown themselves to be robust in the face of economic modeling. Hence, many points of view are held by widely diverging economists, who then proceed to draw different policy prescriptions from them.
Credit disruption theories
One class of theories about the Great Depression is that a series of financial shocks disrupted the ability of the banking system to allocate credit, and that the result was a sharp contraction in the access to funds by business and the consumer.
The 1929 stock market crash as a trigger
In the popular imagination, the Great Depression was started by the "Crash of 1929". On October 29, 1929 (the day also known as the Black Tuesday), share prices on Wall Street collapsed catastrophically, setting off a chain of bankruptcies and defaults that quickly spread overseas. The events in the United States were the final shock in a worldwide depression, which put hundreds of millions out of work across the capitalist world throughout the 1930s. In truth, economic instability had been growing for some time. However, the impact of the 1929 crash was notable because Wall Street was where the wealthy of Europe had increasingly banked their gains. The crash would dramatically reduce the total percentage of wealth held by the very top of the economic scale, and would create financial difficulties for many of them.
The market crash in the U.S. was the final straw for the already shaky world economy. There had been a series of financial crisis points through the 1920s including Germany suffering from hyperinflation, and turbulence associated with Britain attempting to reestablish the gold standard on a prewar price basis. Many of the Allied victors of World War I were having serious problems paying off huge war debts, which had led to loan programs from the United States. In the late 1920s, the U.S. economy at first seemed immune to the mounting troubles, running a huge balance of trade surplus, but in 1930, what seemed like a cyclical downturn in the economy turned into a massive economic crisis.
Misallocation of credit
One theory according to contemporary economists such as Peter Temin, as well as observers at the time such as John Maynard Keynes, is that international finance never recovered from the strains of World War I. After the world war, there had been a rapid increase in industrialization, as well as sharp cuts in armaments by the major powers, which caused a dramatic increase in productive capacity, particularly outside Europe, without a corresponding increase in sustained demand. Fixed exchange rates and free convertibility gave way to a compromised gold standard that lacked the stability to rebuild world trade. According to this view, the major problem was that the world financial system did not have the ability to increase aggregate demand as fast as supply was increasing. There was an "over-investment" in the late 1920s, which lead to a financial bubble that finally came crashing down into a vicious circle of deflation.
One of the features of this theory, which has made it appealing to its adherents, is that it explains not only U.S. fiscal experience but Europe as well, even for the totalitarian states such as Benito Mussolini's Italy and Adolf Hitler's Germany.
In 1929 the world's most prosperous nation was the United States. However, despite the confidence in the U.S. economy and the apparent economic well-being in other countries, the world economy was in an unhealthy state. One by one, the pillars of the pre-war economic system—multilateral trade, the gold standard, and the interchangeability of currencies—began to crumble.
The U.K. had returned to the gold standard in 1925 but had spent the previous five years managing the gold price down to its prewar level. This forced a sharp deflation across the economy of the U.K. and the many other nations that used the Pound Sterling as their national unit of account.
The U.S. economy had been showing some signs of distress for months before October 1929. Commodity prices had been falling worldwide since 1926, reducing the capacity of exporters in the peripheral, undeveloped economies of Latin America, Asia, and Africa to buy products from the core industrial countries such as the U.S. and U.K. Business inventories were three times as large as they had been a year before (an indication that the public was not buying products as rapidly as in the past); and other indicators of economic health—freight carloads, industrial production, wholesale prices—were slipping downward.
Recent wok in neoclassical economics and rational expectations macro-economic theory has asserted that the cause of the slow recovery was the New Deal National Recovery Act and its "cartelization" policies. From this perspective, the "great contraction" of money supply was inevitable as a reaction to the increases in postwar buying power. The end of deflation and contraction in 1933, along with the price adjustments should have lead to an expansion and recovery by 1936 given the macroeconomic variables. Therefore, this theory proposes that some new shock was required to hinder the economy, specifically the price stickiness and market distortion allowed by the NRA and other "cartel" policies of the New Deal. This view was argued in an intuitive way at the time by Louis Brandeis. Arguing against this view are economists who point out that the major industrial upsurge of the Second World War was even more cartel oriented, and if there is such an effect, it should have offset later fiscal stimulus, and the inapplicability to the recoveries in Sweden and the experience of Nazi Germany.
Debt-deflation
Almost all theories of the Great Depression note that one contributing cause was the debt deflation trap: namely, that money borrowed when prices are at a higher level, means repaying with more output. As Arthur Schlesinger noted, the amount of cotton that a farmer had to produce to pay off his loans rose by thirty percent. In theories of the Great Depression, such as those advanced by Benjamin Bernanke, it is this disruption, where people fear to borrow because they fear having to repay back in much more expensive dollars, that disrupts the credit process, and lies at the root of the Great Depression. The important difference between a pure monetary theory such as Milton Friedman's and the wage misallocation theory, is that it is deflation itself that is the culprit that drives the contraction in the money supply: banks lend less, because people fear debt, and even if the Federal Reserve had eased, that this cycle would have continued unless monetary policy overshot and produced outright inflation. The solution, under this model, would have been similar to the monetarist model, namely have the Federal Reserve flood the American economy with liquidity, but it also would have required a matching devaluation of the dollar against gold, which is what U.S. President Franklin D. Roosevelt did in 1933-1935, in order to end the fear that any inflation was "temporary." This devaluation would have had to be even sharper than that which eventually occurred.
Since inflation, not deflation, was the primary fear at the time—the great inflationary shock from the First World War and its aftermath were still prevalent in every policy maker's mind—it is questionable whether any policy actors could have acted on this theory.
A misdistribution of purchasing power
One theory held by many at the time and since, including Franklin Roosevelt and his brain trust, holds that the fundamental misdistribution of purchasing power, the greatly unequal distribution of wealth throughout the 1920s, caused the Great Depression.
According to this view, wages increased at a rate that was a fraction of the rate at which productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into profits. As industrial and agricultural production increased, the proportion of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing.
Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge or below the subsistence level—too poor to share in the great consumer boom of the 1920s, too poor to buy the cars and houses and other goods the industrial economy was producing, too poor in many cases to buy even the adequate food and shelter for themselves. As long as corporations had continued to expand their capital facilities (their factories, warehouses, heavy equipment, and other investments), the economy had flourished. Under pressure from the Coolidge administration and from business, the Federal Reserve Board kept the discount rate low, encouraging excessive investment. By the end of the 1920s, however, capital investments had created more plant space than could be profitably used, and factories were producing more than consumers could purchase.
An increase in margin buying, the act of borrowing money from brokers in order to buy more stocks, helped many people invest in the roaring stock market of the 1920s. When the stock market began to decline, the lenders panicked and demanded their money back. This increased the sales of stocks to pay off the loans, but many people remained in debt, and the lenders could not get their money back.
According to this view, the root cause of the Great Depression was a global overinvestment in capacity compared to wages and earnings from independent businesses, such as farms. The solution that it proposed is largely the one taken in the New Deal—redistribute purchasing power, maintain the industrial base, but devalue the currency against gold and use government regulation to force as much of the inflationary increase in purchasing power into wages. It is generally seen as being opposed to the more strictly monetary solution proposed by Milton Friedman.
The Federal Reserve and the money supply
Another theory of the Great Depression, forwarded most notably by economists Milton Friedman and Anna Schwartz, involves the quantity theory of money. According to this theory, most of the depression's severity was caused by poor decision-making at the Federal Reserve.
For the first four years of the Depression, the Federal Reserve Board contracted the money supply at a time when Friedman says they should have been expanding it. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third."
The result was what Friedman calls the "Great Contraction"— a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. A corollary of this theory rejects the gold standard theory of the depression. It is a notable development because it implies that the depression's severity was caused by the Federal Reserve's mismanagement of the economy, not the absence of management. This theory is popular among the monetarist school of economics. Many give credence to Friedman's theory because the theory has robustly explained subsequent U.S. recessions and inflations.
The contraction in money supply is a factor in most theories of the Great Depression, and it is another way of saying that there was a tremendous fall in aggregate demand. From the perspective of monetarist explanations for the Depression, the depth of the financial collapse could have been averted by monetary policy, rather than requiring what eventually did happen, namely the use of regulations and fiscal policy to stabilize the economic activity in the U.S. and other nations. According to the monetarist formulation, the root cause of the global downturn was the failure to reestablish the gold standard at a level higher than the pre-war level, in order to account for inflation. This view was held by many observers at the time, even those who supported a return to the gold standard.
The debate over this theory centers on whether easing of monetary policy would have actually corrected structural imbalances in the economy, or whether it would have simply led to a secondary bubble which would have collapsed later, after increasing the U.S. deficit and depleting U.S. gold stocks. To monetarists, there were no structural imbalances to cure, the problem was strictly an ordinary downturn extended into a deeper one through poor monetary policy.
A lack of diversification
Another theory attributes the Depression to a serious lack of diversification in the American economy of the 1920s. Prosperity had been excessively dependent on a few basic industries, notably construction, automobiles and radio; in the late 1920s, those industries began to decline. Between 1926 and 1929, expenditures on construction fell from $11 billion to under $9 billion. Automobile sales began to decline somewhat later, but in the first nine months of 1929, they declined by more than one third. Once these two crucial industries began to weaken, there was not enough strength in the other sectors of the economy to take up the slack. Even while the automotive industry was thriving in the 1920s, some industries, agriculture in particular, were declining steadily. While the Ford Motor Company was reporting record assets, farm prices plummeted, and the price of food fell precipitously.
Postwar deflationary pressures
The Gold Standard theory of the Depression attributes it to postwar deflationary policies. During World War I many European nations abandoned the gold standard, forced by the enormous costs of the war. This resulted in inflation, because it was not matched with rationing and other forms of forced savings. The view of economic orthodoxy at the time was that the quantity of money determined inflation, and therefore, the cure to inflation was to reduce the amount of circulating medium. Because of the huge reparations that Germany had to pay France, Germany began a credit-fueled period of growth in order to export and sell enough abroad to gain gold to pay back reparations. The United States, as the world's gold sink, loaned money to Germany to industrialize, which was then the basis for Germany paying back France, and France paying back loans to the United Kingdom and United States. This arrangement was codified in the Dawes Plan.
This had a number of economic consequences in its own right. However, what is of particular relevance is that following the war, most nations returned to the gold standard at the pre-war gold price, in part, because those who had loaned in nominal amounts hoped to recover the same value in gold that they had lent, and in part because the prevailing opinion at the time was that deflation was not a danger, while inflation, particularly the hyperinflation experienced by Weimar Germany, was an unbearable danger. Monetary policy was in effect put into a deflationary setting that would over the next decade slowly grind away at the health of many European economies. While the Banking Act of 1925 created currency controls and exchange restrictions, it set the new price of the Pound Sterling at parity with the pre-war price. At the time, this was criticized by John Maynard Keynes and others, who argued that in so doing, they were forcing a revaluation of wages without any tendency to equilibrium. Keynes' criticism of Winston Churchill's form of the return to the gold standard implicitly compared it to the consequences of the Versailles Treaty.
Deflation's impact is particularly hard on sectors of the economy that are in debt or that regularly use loans to finance activity, such as agriculture. Deflation erodes the price of commodities while increasing the real value of debt.
The credit structure
Farmers, already deeply in debt, saw farm prices plummet in the late 1920s and their implicit real interest rates on loans skyrocket; their land was already mortgaged, and crop prices were too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural economy, were in constant crisis in the 1920s as their customers defaulted on loans due to the sudden rise in real interest rates; there was a steady stream of failures among these smaller banks throughout the decade.
Although most American bankers in this era were staunchly conservative, some of the nation's largest banks were failing to maintain adequate reserves and were investing recklessly in the stock market or making unwise loans. In other words, the banking system was not well prepared to absorb the shock of a major recession. The banking system as a whole, moreover, was only very loosely regulated by the Federal Reserve System at this time.
The breakdown of international trade
Another factor contributing to the Great Depression was America's position in international trade. Protectionist impulses would drive nations to protect domestic production against competition from foreign imports by erecting high tariff walls. The Hawley-Smoot Tariff Act of June 1930 raised U.S. tariffs to unprecedented levels and ignited a worldwide tariff war with other countries adopting retaliatory trade restrictions of their own. Smoot-Hawley practically closed U.S. borders and, with retaliatory tariffs from U.S. trading partners, caused the immediate collapse of the most important export industry, American agriculture.
One theory posits that the Smoot-Hawley tariff's negative effects on agriculture were especially harmful because it caused farmers to default on their loans. This event may have worsened or even caused the ensuing bank runs in the Midwest and west that caused the collapse of the banking system.
Prior to the Great Depression, a petition signed by over 1,000 economists was presented to the U.S. government warning that the Hawley-Smoot Tariff Act would bring disastrous economic repercussions; however, this did not stop the act from being signed into law.
Beginning late in the 1920s, European demand for U.S. goods began to decline. That was partly because European industry and agriculture were becoming more productive, and partly because some European nations (most notably Weimar Germany) were suffering serious financial crises and could not afford to buy goods overseas. However, the central issue causing the destabilization of the European economy in the late 1920s was the international debt structure that had emerged in the aftermath of World War I.
When the war came to an end in 1918, all European nations that had been allied with the United States owed large sums of money to American banks, sums much too large to be repaid out of their shattered treasuries. This is one reason why the Allies had insisted (to the consternation of the perhaps historically vindicated Woodrow Wilson) on demanding reparation payments from Germany and Austria. Reparations, they believed, would provide them with a way to pay off their own debts. However, Germany and Austria were themselves in deep economic trouble after the war; they were no more able to pay the reparations than the Allies were able to pay their debts.
The debtor nations put strong pressure on the United States in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, U.S. banks began making large loans to the nations of Europe. Thus, debts (and reparations) were being paid only by augmenting old debts and piling up new ones. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high U.S. tariffs were making it much more difficult for them to sell their goods in U.S. markets. Without any source of revenue from foreign exchange with which to repay their loans, they began to default.
The high tariff walls critically impeded the payment of war debts. As a result of high U.S. tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s, the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and Britain. Similarly, U.S. investments abroad provided the dollars, which alone made it possible for foreign nations to buy U.S. exports.
By 1931 the world was reeling from the worst depression of all time, and the entire structure of reparations and war debts collapsed.
In the scramble for liquidity that followed the 1929 stock market crash, funds flowed back from Europe to America, and Europe's fragile economies crumbled.
Cyclical theories
One entire family of theories of the Great Depression argues that the inherent cyclical nature of capitalist economics creates the potential for massive downturns if a series of cyclical factors align. First advanced by Joseph Schumpeter in the 1930s, cyclical theories can be divided into real interest credit cycles, some making use of Austrian economics, and exogenous cycles, which focus on the exogenous causes, or, to put it another way, the Great Depression was the result of self-fulfilling prophecies: namely a drop in confidence.
Long cycle theories
Schumpeter believed that there were three major cycles in economics, the long Kondratieff wave of fifty years duration, which represented major disruptive innovations, such as the introduction of telecommunications or internal combustion, the Juglar wave of roughly a decade duration that had to do with microeconomic allocation of resources geographically and consequently with population movements, and the Kitchin cycle, a short inventory cycle of overproduction, price reduction, retrenchment and expansion. According to Schumpeter the Great Depression was simply the point where these waves bottomed simultaneously, or nearly so, in the major world economies.
The theory rests on the demonstrability of stable wave patterns in economics, and on the relationship between these waves. Economic historians and economists such as Simon Kuznets have argued that there are stable waves of 15 to 20 years length, which corresponded to periods of above trend line growth followed by periods of below trend line growth that culminated in a depression. This theory has termed the cause of the Great Depression as "secular stagnation", that is, a period of low entrepreneurial activity that was compounded by short-term business stagnation.
These theories tend to focus on one of two primary causes for secular stagnation. One is the demand side theories, which argue that population growth, tailed off after the population boom of the post-World War I period, which reduced the demand for consumer goods, and consequently the opportunities for business development. The other set of theories argues that there was a saturation of the consumer goods of the previous cycle, and that until a new wave of goods appeared there would be limited demand.
Both of these groups of theories have been criticized because while they may take into account the severity of the slide of the Depression, they do not explain the duration. Nor do they explain where there has been no depression of comparable magnitude since then.
It should be noted that these cyclical theories have analogs in many of the political theories of the time. For example, the "closing of the frontier" theory of the Depression—called the "frontier hypothesis," is closely related to the length of population movements. Demand shortage theories offer predictions similar to the population model. Finally, overproduction models are similar to cyclical theories that focus on capital concentration such as the work of Steindl.
Stiendl's work is particularly important because it had an influence on Keynesian theory, particularly in the problems created by price inflexibility, which in Keynsian analysis is called "price stickiness." The macroeconomic implication of this idea is that businesses will react to decreases in demand not by reducing prices, but by reducing output and keeping prices high, particularly in order to prevent the creation of deflationary expectations—that is a situation where consumers don't buy because they feel certain that prices will be lower later. Stiendl's formulation of the results of price inflexibility therefore resembles Keynesian predictions of a deflationary spiral—one argues that there is insufficient price reduction on the supply side, and the other insufficiency of aggregate demand. The difference being primarily the difference in the theory of money: for Steindl money is a commodity, where as in Keynsian theory Money, Interest and Labor make up a three-valued market.
"Sunspots"
One term among many for external factors being the primary cyclical causes of economic recessions is "sunspots." These differ from the supply and demand long cycle models in that they seek to model such non-price factors as "consumer confidence" and "expectations." In sunspot models, the collapse in production and demand in the Great Depression itself is a conventional macroeconomic event, but the slow recovery is explained by the shock to consumer confidence. These theories then invert the cause and effect of the typical Keynesian explanation: that is, rather than deflation causing a reduction in spending, which leads to retrenchment and lack of confidence of investment, first there is lack of confidence which becomes self-fulfilling when it produces a decline in aggregate demand.
One reason that such theories have had difficulty gaining attention is that they resemble many conservative theories of the Depression from the time period: that is a lack of business confidence created by budget deficits was the cause of the Depression. Since this theory, when applied at the time, worsened the economic crisis, and when applied later, slowed recovery, confidence models of the Great Depression tend to have to overcome a hurdle.
The difference between confidence models in the 1930s and the modern ones is that modern confidence models assert a closer microeconomic foundation for the relationship between confidence and macroeconomic variables that they propose as the causes of lack of confidence. In particular, they argue that, rather than interest rates driving business cycles, those interest rates are simply responding to self-fulfilling expectations of agents. And that rather than high real interest rates causing downturns, sunspot theories argue that a decline in credit demand leads to increased real interest rates, which in turn aggravates a reduction in confidence.
Marxist theories of the Great Depression
In Marxian economic theory, the Great Depression represented a "crisis," a term that has a specific meaning in this context: namely, when basic underlying contradictions in the mode of production and distribution make a particular set of arrangements untenable. A simple example of a crisis is if an economy needs more and more skilled workers, but reduces wages continually so that people have less and less ability to become educated. At the point where there are no skilled workers to be had, there is a crisis of production. In classical economics, the rate of profit tends to fall over time, as mentioned by Adam Smith in Wealth of Nations. Marxist theory, being rooted in pre-neoclassical economics, accepts this proof, and argues that falls in profit are the ultimate cause of "crisis."
According to Marxian theory, consumption comes from profit, and since in a profit economy, profit is private, consumption is limited to the ability of individuals to consume. Production, however, is public, since it is backed by the state and public resources, and expands without limit. Thus, according to Marxism, either there is a periodic contraction in consumption, or there is a further spiral of emmiseration, as those who have glutted their desire to consume proceeded to control more of the means of production. This leads to a greater alienation of the means of production from the mass of those who consume, and sets up another march towards the next crisis. Eventually the internal contradiction would be so great that workers would rebel rather than starve, and thus end the capitalist phase of world history.
According to Marxist theory, crisis is caused, not by a fall in wages, but paradoxically by a rise in wages. This rise in wages creates a greater level of under consumption, and this means that while capital has been risked in wages and equipment, it is not returned. From this begins a general spiral downward. Production is reduced to meet profits, which causes unemployment, which creates more of an incentive not to consume, and so on. In this model, the key feature is that commodities tend to fall, as capitalists with hold investment and drop production, even as real prices are rising, because to maintain total profits with falling production, prices must rise.
In this model the cause of the Great Depression was the introduction of dramatic improvements in productive capacity which under cut the vast majority of firms which could not afford the new methods. Those firms that could continue on, taking market share away from those that could not, but even they reached the point where they could not fully utilize capital, and would then retrench.
At the time, these views corresponded with other "overproduction" theories, and seemed to explain how, even with general technological advance, greater prosperity was not forthcoming. As a result, while not adopted wholesale by mainstream economics, many practical policies were implemented by officials with Marxist backgrounds.
Ideological perspectives on the causes of the Great Depression
Socialist and communist perspectives
At the time of the Great Depression ideas abounded that the Great Depression was the result of systematic failure. Many in the U.S. believed that it represented, alternately, the result of too much government interference in the economy, or conversely the failure of the "cut throat capitalist system based on the profit motive," as Commerce Secretary Henry Wallace described it. Many Marxist and socialist writers of that time thought the Great Depression was the predicted crisis of capitalism brought on by internal contradictions.
Many ideological theories drive other more mathematical theories of the Great Depression, and several observers have noted that the Great Depression tends to produce theories, which confirm the policy preferences of the researcher. The three broad categories of ideological theory can be described as internal critique of capitalism from within a liberal democratic framework, critiques of democracy from within a liberal capitalist framework, and critiques of capitalism from a Marxist framework.
For Communists in the 1930s and since then, the existence of the Soviet Union was taken as proof that "socialism" would eventually triumph, and the Great Depression was seen as the result of the failure of capitalist societies. Since the USSR hid the results of the famines taking place at the time, there was even credence to this view from the outside. Since the liberal democratic critique of the Great Depression included elements of over-concentration of wealth, there was a correspondence in the two theories. Hence, even some who were adamantly opposed to Bolshevism and Communism accepted that some form of public planning of consumption to prevent a general glut was essential.
Liberal perspectives
An influential book at the time was The Modern Corporation and Private Property by Berle and Means. In it, they argued that the managerial class had possession of the mechanisms of power to the exclusion of shareholders who were the real owners. They linked this criticism to the criticism of corporate capitalism that the population as a whole constituted the shareholders of the economy. They argued that this misallocation of power in the hands of those who had a chance to gain profit, but were not exposed to the full consequences of risk, was the root cause of the economic downturn. The critiques of the "profit motive" argued that in national emergencies it was iniquitous for some to be insulated from the general effects. They also argued that since profit was not connected to the general good, that pursuit of profit before all else would lead to general misery, as decisions were made based on temporary flows of money.
These critiques, rooted in populism and in the suspicion of large concentrations of wealth, as well as the deprivation of the Depression, were reflected in the drive for greater government regulation over the economy, a push for higher marginal tax rates, and in attempts for more "cooperative" economic organization. While often derided as wholly headed and anti-business, some of these formulations have found support in Game theory, which shows how actors with dominant strategies can force sub-pareto optimal solutions on a larger system.
Under these ideas, there was a relaxation of the anti-trust laws of the time, and an introduction of price and production planning under the National Recovery Act. However, these failed to stem the tide of the Depression, and many of them were abandoned by the time of the "Second Hundred Days." What remained behind was an increasing attempt, rather than to regulate away competition, to ensure competition, and instead of trying to prop up prices by government means, to prop up demand by government spending.
Anarcho-capitalist perspectives
Another class of ideological theories holds the reverse—that rather than the Depression being the result of insufficient democracy and social accountability of corporations, that it was instead an interference in the capitalist market by government that was the cause of the Great Depression. Murray Rothbard is one such theorist.
These theories are often closely related to monetarist theories of the Great Depression, arguing that the existence of a central banking system in the major nations created a misallocation of supply and demand, and that attempts to interfere with the microeconomic allocation of goods by attempts at central planning turned the down turn into an unworkable and prolonged depression.
While often framed in moralizing terms attacking FDR and the liberal program of the time, these theories found support even in the Roosevelt administration. The belief within the administration was that the government had, indeed, "lived beyond its means" and that previous attempts at cooperation had lead to corporate collusion. The solution was to enforce greater competition in markets, which had had monopolies develop.
Related articles
- Great Depression
- Classical economics
- Marxist economics
- Neoclassical economics
- Keynesianism
- Monetarism
- Austrian School
- Neo-Keynesian Economics
