mrchristiandpierce

Tag: economics

  • The Cause and Recovery of the Great Depression; The Austrian School and its Adherents

    Economic downturns have deleterious effects on a nation’s well-being and, can spread to other nations like a tornado wreaking havoc as it goes. The United States economy collapsed in 1929, and economists today describe it as a dramatic turn of events (rather than merely a recession) due to the totality of its results which included the numbers of lives impacted and how much money people lost.

    These periods of decline in economies are analyzed statistically in the modern world and, they are often described as related to ‘boom-bust’ cycles. The graphical (x/y axes) representation of economic events in capitalist societies show a line that progresses chronologically and indicates upswings and downswings (otherwise known colloquially as peaks and valleys) of some sort of variable plotted on the y axis (e.g., GDP, unemployment) compared to months or years on the x axis.

    Historians rely on economic data to allow them to compare time periods so they can describe past events accurately. There are many different theories that try and explain the causes and recovery of the Great Depression that occurred during the late 1920s and early 1930s. One economic school of thought that does this is called the Austrian School of Economic Theory. Carl von Menger (died 1921) was a Viennese Economist, and he was the founder of this School. He tutored Crown Prince Rudolf (committed suicide with his mistress) who was the heir to the Habsburg throne in Vienna. His seminal work was Principles of Economics (1871).1



    Two of the leading theorists in that school are Ludwig von Mises, who wrote The Theory of Money and Credit (1924), and Friedrich von Hayek, who wrote Monetary Theory and the Trade Cycle (1933).2 Both of these economists lived through the Great Depression and well beyond. Both had ancestors who were German/Austrian Royals since we see “von” in their surnames. Von Hayek fought for the Austro-Hungarian Army in World War One and was a professor for a time at the University of Chicago (before that he analyzed Federal Reserve and American economic data with Professor Jenks at New York University when he was an assistant there).3 Von Mises emigrated to the United States and lived there until his death (1973) after having fled the Nazis (he was Jewish). Hayek shared the Nobel Prize in Economics in 1974 with Gunnar Myrdal.

    There is no consensus about the causes of the Great Depression. The end of the use of the gold standard (during World War One) in the United States and Europe is often held liable for contributing to the economic problems during the Interwar Years. There is another popular belief that the Stock Market Crash in 1929 caused the Depression. Most economists hold that neither of these two concepts could have been blameworthy.

    The Austrian School of Economics focuses upon several fundamental ideas that can be applied to an analysis of the causes of the Great Depression and its subsequent recovery. Mainly, it supports the concept that business cycles go through ‘booms’ and ‘busts’ due to government manipulation of interest rates (The Federal Reserve System). Too many low interest loans are allocated using lower credit worthiness standards. This profligate, wasteful lending fuels a ‘boom’ that cannot be sustained and the economy at some point later ‘busts.’ This is due to the fact that artificially lowered interest rates (not done by the market) fool investors into believing good investment opportunities exist, especially in capital goods. The Austrian School called this ‘malinvestment.’ At this point capital needs to be reallocated and liquidated (sold off) since the malinvestment creates poor allocation of resources.

    The Austrian School theory of the causes of the Great Depression is referred to as ‘heterodox’ by modern economists since it is not considered mainstream (e.g., Keynesian or Monetarist Theory). Keynesians take a demand driven approach (consumption and investment were reduced by a lack of demand) while Monetarists see the Depression having been at first a typical recession that became exacerbated by a serious shrinking of the money supply.

    According to Fred E. Foldvary in, The American Journal of Economics and Sociology, “The Austrian business cycle theorem begins with the interest rate. In
    Austrian thought, the rate of interest is based on ‘time preference.’ As a fundamental premise of economics in general, time preference is the proposition that most people usually prefer to obtain goods sooner rather than later.”4 Included in this idea is that there is a ‘natural interest rate’ that is a correlate of time. It is common sense that if a purchase is delayed because a consumer has no access to money there would not be any interest paid at all. If they do not want to delay their purchase and they want a product immediately, but have no way to pay for it, they borrow money to do it. Hypothetically, with no central bank in a market that is entirely ‘free,’ the interest rate would reflect the value of the ‘real interest rate’ that people would pay based upon how much value they would receive by buying the good now rather than in the future.

    The Austrian School believes that it is the inappropriate meddling with this interest rate in an artificial manner that causes recessions and depressions. Basically, money is lent ineffectively in the above scenario, and the real economy (rather than an imaginary one) gets adversely impacted with price and spending distortions. Hayek put it best when he said, “[t]he cause of cyclical fluctuations is that because of the elasticity of the value of money, the rate of interest is not always equal to the equilibrium rate but is in the short run determined by banking liquidity.”5 The Austrian School Economists believe the American Great Depression was caused by a distortion in the previous ‘boom’ in the 1920s due to the lowered interest rate policy of the Federal Reserve (prior to 1929). Ultimately, they held the economy recovered not by the actions of the American Government’s stimulus policies (they did not enact any), but it recovered on its own.

    1. Menger, Carl. Principles of Economics. Trans. by James Dingwell and Bert Hoselitz. New York: New York University Press, 1976. ↩︎
    2. Mises, Ludwig von. The Theory of Money and Credit. trans. by H.E. Batson. Indianapolis: Liberty Classics, 1924.; Hayek, Friedrich von. Monetary Theory and the Trade Cycle. Trans. by N. Kaldor and H. Croome. New York; Augustus M. Kelley, 1933. ↩︎
    3. A.J. Tebble. F.A. Hayek. New York: Continuum International Publishing Group, 2010, p., 4-5. ↩︎
    4. Foldvary, Fred E. “The Austrian Theory of the Business Cycle.” The American Journal of Economics and Sociology 74, no. 2 (2015): 278–97. http://www.jstor.org/stable/43818666. ↩︎
    5. Hayek, Friedrich von. Monetary Theory and the Trade Cycle. Trans. by N. Kaldor and H. Croome. New York; Augustus M. Kelley, 1933. ↩︎

  • Growth in the Postbellum Economy: The Comparison of Two Sectors

    One aspect of the postbellum economy that has interested scholars is agricultural productivity growth. Any outside observer (non-economist) interested in the labor component to the Civil War struggle (liberation of slaves-agricultural workers in the South) would concern themselves naturally with whether the War’s outcome resulted in an increase in agricultural productivity across the nation as a whole. Two sectors (number of agricultural workers versus number of non-agricultural workers) of the economy can be analyzed to aid in determining whether agricultural output had risen. The historiography of the topic must also include the efforts of economists as it is a question relevant to economic history.

    Prior to 1966, the consensus amongst scholars was that agricultural productivity increased throughout the 19th Century steadily. Marvin Towne and Wayne Rasmussen (1960) published findings on gross farm product that corroborated this. However, Stanley Lebergott published data in 1966 that caused a debate concerning this and his figures suggested agricultural productivity growth was actually slower after the Civil War compared to before. Now it appeared postbellum productivity was not as previously thought and was surprisingly lower than before the War. Yet, Thomas Weiss in 1993 questioned the Lebergott data and was found to be accurate.

    The method used to analyze agricultural output is simply the number of workers in the agricultural sector. This is designated by the United States Census Bureau, and these tables can be examined for the postbellum period. In this blog, the study’s purpose is to compare the increase or decrease of agricultural workers to nonagricultural workers and show that both sectors grew thus there was more productivity in both. The statistics show that in the postbellum period, agricultural output (measured by number of workers gainfully employed in that sector) grew. Concomitantly, other sectors (or industries) had an increase in the number of workers. This analysis is not meant to show findings that indicate the agricultural output of the nation was higher after the War than before as Weiss concluded. It is merely meant to compare two sectors of the postbellum economy to each other concerning growth.

    The Census bureau changed the form used after 1910 to allocate the number of farm workers. These figures gleaned from that data can be applied to the data from earlier years that may not have included specific breakdowns on the census form of laborers who may have been farm workers. Statistical techniques can be used, such as logistic regression analysis, to determine to what degree certain characteristics may have affected the data after 1910. This can be applied to the postbellum period where the data is lacking, and it sheds insight on the gaps of knowledge that affect the data (how many “laborers” on the old census form were farm workers).

    According to Freedman, in Statistical Models and Shoe Leather, regression modeling can be suspect. He does not believe regression can provide answers in a causal argument. In this journal article, he believed, correlation is not the same as causation. A proper kind of theory or empirical validation is necessary, or conclusions cannot be trusted using linear or multilinear models of regression when applying these statistical tools to a causal argument. This study in this blog, is not engaging in speculation of causation. It is merely trying to compare two sectors of the postbellum economy concerning the growth of those sectors using data of numbers of workers.

    According to Weiss in 1880 there were 8,302,000 agricultural workers and then in 1900 there were 10,496,000. In nonagricultural work, according to the same researcher, there were 9,088,000 workers in 1880 and 18,574,000 in 1900. These figures clearly indicate that in the last two decades of the 19th Century there was growth in both sectors of the economy.

    Alfred Chandler wrote “Organizational Capabilities and the Economic History of the Industrial Enterprise,” which appeared in the Journal of Economic Perspectives (1992). He suggests the modern business entity first appeared in the 1880s. This was an era he describes as the Second Industrial Revolution. Modern transportation and communication networks (railroads, telegraph, steamships, cable systems) revolutionized deliveries of goods and services. Examining the labor statistics for this study we notice the significant growth in both sectors of the economy that were compared (agricultural and nonagricultural). Applying Chandler’s depiction of that highly significant time period economically, it gives a good backdrop to envision how the growth rates measured by the numbers of workers looked the way they did.

    Comparisons in economic history can be done using statistical data in a variety of ways. Data can be less reliable the further back researchers go in history due to unreliable archival results. New methods of compiling data surface as we see here when Weiss’ results contradicted Lebergott’s and the two researchers had different opinions on agricultural growth before and after the U.S. Civil War. Comparisons of data can be a valuable tool that aids historians trying to write narratives about the past. This comparison study using the numbers of workers in two different sectors of the economy shows how the American economy grew in the postbellum period. One tentative conclusion that can be made is that many ex-slaves may have remained in agricultural roles, and they may have stayed in that sector if and when they migrated to the North after the struggle.