Wednesday, June 11, 2008

A Million Little Problems

There was a letter in yesterday’s Wall Street Journal (no longer available online) by Kenneth Lee of Rayton, MO, responding to this piece by Amity Shlaes on the Great Depression and why it was Great. The author argues:

Amity Shales is just guessing that her economic theory about the Depression is valid. She cannot recreate all the factors that led to the Depression, or account for the utter despair that engulfed us. Unfortunately, FDR didn’t have the luxury of do-overs. He had one chance to act and the fate of a nation hung in the balance.

But that is exactly the problem. One of the greatest problems of the triumph of modern macroeconomics is the belief that “the economy” is a simple uniform chemical solution, one that reacts to government policy (the introduction of a precise amount of a new substance) in perfectly predictable ways. In fact “the economy” is the sum total of a constant stream of decisions by hundreds of millions of people within our borders, more and more linked to the choices of people outside it. When by crude aggregate measures “the economy” goes bad, it is not necessarily amenable to cures by macroeconomic nostrums such as a “stimulus package.” Instead, “the economy” consists of assets (including human capital) and decision-makers, with each of the latter possessing unique goals while facing different and constantly changing prospects. At a moment some geographic jurisdictions seem to be characterized on average by diminishing prospects, even as some are characterized by the opposite.

The Great Depression was not one big problem, it was a million little ones. A decade of rapid technological change after World War I was in need of sorting out, and the stock market crash of 1929 was the least imperfect way of doing that. Some experiments turned out to be successful, others failed. The trouble with FDR arrogating unprecedented power unto himself to solve the One Big Problem was that he was not betting his own money, and had only very crude tools to impose on everyone at once. The fact that he constantly changed his mind – the value of the dollar against gold would be up one week, down one next, depending on what FDR had for breakfast, rules for what kind of business conduct was and was not permissible set (and constantly re-set) by his monstrous NRA - made entrepreneurial planning considerably more difficult. Business owners, never knowing what the rules of the game were going to be tomorrow, recognized that they would be fools to invest today. When FDR made a mistake (and everything he did was likely to be a mistake, given what he knew and what he had incentives to know), it could not help but be a massive one. Something to think about the next time someone proposes a major government solution to this or that economic “crisis.”

I hope to live long enough to see the day when the history of the Great Depression and why it lasted so long taught to most of us in school incorporates this idea.



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