Stories of the 1930s
By Arnold Kling
I am reading The Dark Valley: A Panorama of the 1930s, by Piers Brendon. Much of it annoys me. For example, he writes,
Nor did he [President Hoover] attempt to reduce financial inequalities, perhaps the most fundamental cause of the Crash.
The story that the Depression was caused by unbalanced income distribution took root very early among historians. I think that a lot of this came from Marx, who predicted a cycle in which the rate of capitalist profit would rise and crash in ever-increasing extremes. I am not saying that historians were Marxists, but his theories were in the air, and other theories did not displace them.
Along these lines, Brendon writes,
Edmund Wilson was one of a number of middle-class intellectuals who concluded that “Karl Marx’s predictions are in the process of coming true.” Capitalism was in crisis because of its inherent contradictions: economic competition resulted in greater industrial efficiency at the expense of workers, so “the more cheaply and easily goods can be produced, the fewer people are able to consume them.” By contrast, Wilson was impressed by the apparent success of Stalin’s Five Year Plan
Once the first generation of Depression historians had emphasized unbalanced income distribution, then future historians kept the story alive. The line of least resistance when writing history is to quote other historians, so there is a sort of path-dependency in the process. But among economists, I think that the focus is on monetary factors (including mishandling of the gold standard), financial factors (problems with banks), and supply-side factors (regime uncertainty, trade barriers).
Incidentally, in other ways, I think that Marx had a huge influence on economists who do not consider themselves Marxists. For too long, under the shadow of Marx, economists have had an intense focus on the process of capital accumulation, as illustrated by the popularity of the Solow Model of economic growth. Only when the Solow Residual started to be taken seriously, by Paul Romer among others, did we start to realize the importance of factors other than physical capital. Now we have Mokyr’s analysis of knowledge and science, McCloskey’s analysis of culture, North’s analysis of institutions, and so forth. See From Poverty to Prosperity.