Tuesday, 16 April 2013

Joseph Stiglitz and Bruce Greenwald on Productivity and the Great Depression

An earlier article addressed Robert Gordon's grim forecast that America may face a low-growth future, just as all economies suffered pre-1750, before the Industrial Revolution.  If he's correct, it'll mean that standards of living in America will increase only slowly in the decades to come, though thankfully, given the immense wealth of the US economy, it'll increase from a high base.  Nobel Prize holder Joseph Stiglitz, along with his Columbia University colleague Bruce Greenwald, have contemplated the opposite dilemma: when living standards fall even in periods of high productivity growth - indeed, because of steep increases in productivity.  The period that these brave revisionists consider is one that many have sought to understand: the Great Depression.

In a Vanity Fair article, Stiglitz lays out their findings.  He notes that at the beginning of the twentieth century, a large fraction of the US labor force was required to toil on farms just to feed the nation.  However, rapid improvements in seed quality, fertilization, farming methods and mechanization, combined with the absence of similar increases in demand, depressed farm incomes by half to two-thirds between 1929 and 1932.  This abrupt drop in income, he argues, is what caused the Great Depression.  Not only did it flow from rural areas of the economy into cities - less wealth on farms meant decreased purchases of city-made manufactured goods, for instance - but it jumped from the so-called "real" economy into the financial sector: farmers simply could not meet their obligations, and the financial markets were hit hard as a result.  

This wasn't a problem that could be solved by monetary policy: only the massive, if accidental, fiscal stimulus that occurred in preparation for the Second World War, he argues, saved the US from the long-running horrors of the Great Depression.  These large outlays raised the price of crops, and drew surplus rural labor into newly productive urban factories.  Keynesianism worked.

In case anybody had forgotten, this hypothesis is a reminder that Joseph Stiglitz is one of the world's premiere economists, and Bruce Greenwald is among the finest investment and business minds currently working in academia.  Momentous amounts of energy and brains have been marshaled to understand and to learn from the Great Depression, and justifiably so.  That these two men were able to offer such a novel - and convincing - interpretation of the most carefully studied episode in economic history, and one that occurred 80 long years ago, is very impressive.

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