Tue, Jan 02, 2024 page9

• Historians need a reality check on the Great Depression

  • By Aaron Brown / Bloomberg Opinion
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  The philosopher George Santayana famously wrote, “Those who cannot remember the past are condemned to repeat it,” but also, less famously, “History is a pack of lies about events that never happened told by people who weren’t there.”

  I was thinking of both quotes as I read a recent paper comparing the wildly different causes given for the Great Depression between college-level US history and economics textbooks. That paper is Jeremy Horpedahl, Phillip Magness and Marcus Witcher’s “Teaching the Causes of Great Depression to College Students: Evidence from History, Economics, and Economic History Textbooks,” published in the Journal of Economics and Finance Education.

  This matters because we are undergoing an economic transition that might be comparable in magnitude to the 1930s. The economic consensus that produced the “Great Moderation” was smashed by the financial crisis in 2008. However, unlimited monetary and fiscal stimulus seemed to solve economic problems up to and including COVID-19 pandemic disruptions — mysteriously not bringing the inflation that conventional wisdom predicted. However, inflation returned in 2022 in a painful way and, although it appears to be under control, few are confident that we understand it.

  Moreover, the COVID-19 pandemic accelerated the deadline for long-standing fiscal and demographic challenges faced by the US and other developed democracies. In its wake, some want more spending, while others want deficit reduction and entitlement reform; some want freer trade and more immigration, while others want both restricted; some pin their hopes on cryptocurrencies and other innovations, while others want them blocked. This makes it a good time for educated people to have a clear grasp of economic history — something that is in question as Horpedahl et al illustrate.

  US history textbooks mostly cite causes with no support from academic economists, who in turn promote theories nearly absent from the history texts.

  That is not a problem by itself: No doubt every page of a history text contains material disputed by some reasonable authorities.

  However, it is the nature of the history textbook explanations that concerns me. They are all the conventional wisdom of people at the time that are not merely wrong, they are not coherent or logical theories and they have no empirical support.

  Imagine if the treatment of the Vietnam War trusted only the speeches of US politicians of the time. The war would be described as an external aggression undertaken by agents of a monolithic communist conspiracy bent on global domination, in which Vietnam was merely one domino; and an effort in which the US achieved its goal of peace with honor, leaving the people of South Vietnam free to choose their own government. There is no coherent arrangement of facts that supports this story.

  Getting back to the Great Depression, it is not wrong in principle to cite underconsumption as one of the causes. Yet an economist would ask why people failed to consume. If they did not have enough money or prices were too high, why did they not simply get more money and why did prices not fall?

  Economists also want evidence. Did underconsumption precede the depression it is alleged to have caused? Did places with less underconsumption have milder and shorter depressions? None of the history books appear to address these kinds of questions about any of their alleged causes.

  While there is disagreement among mainstream economists about the causes of the Great Depression, few would argue with the general picture that a series of policy errors turned an ordinary recession into more than a decade of economic misery in the US and a few other countries.

  Many of the errors were actions in opposition to modern ideas: The Federal Reserve tightening rather than loosening monetary policy; the US Congress restricting rather than encouraging foreign trade; then-US president John Edgar Hoover’s administration raising taxes to reduce the deficit rather than spending for stimulus; and then-US president Franklin Delano Roosevelt’s administration declaring war on the supply side by destroying crops and other resources, and jailing people for cutting prices or working too hard.

  These were not random responses. They resulted from non-economic thinking — seeing something bad and trying to force it into a good direction. Economists view most things as equilibrium results of other forces. Making something better usually requires tracing a causal chain, which is often long, to identify and fix the underlying problem.

  The Fed was correct that the stock market was too high, with too much leverage, but wrong to assume forcing it down by restricting leverage would help. Hoover was correct about government finances being out of control, but wrong to increase taxes in response. Roosevelt was right that prices were too low and inventories too high, but destroying inventory and legislating higher prices made things worse.

  Unfortunately, the discussion of economics in both op-eds and speeches by politicians today is no more logical than popular ideas of the 1920s and 1930s. People see inequality or inflation and propose that the government move things in a good direction without doing the careful empirical and theoretical work necessary to know if they are addressing a root problem constructively or merely manipulating a symptom in a way that would backfire.

  Some people, and I lean toward this camp, see the history of the Great Depression as a cautionary tale about overactive and overambitious government. Others view it as an experience that taught us what not to do, so the government could now manage the economy in constructive ways. The optimistic view, however, depends on people learning about not just the specific mistakes of that era, but also the problem with illogical, unsupported policies masquerading as economics. History textbooks need not include rational accounts of the causes of the Great Depression, but they should avoid peddling incoherent non-economics as fact. Say the Great Depression is unexplained or that its causes are too complex and controversial to cover. Or include heterodox explanations rejected by modern economists, but define them clearly, provide consistent theory and reference empirical evidence. Or assign outside readings covering a range of opinion.

  I would hope that US history textbooks provide good coverage of the most important economic event of the 20th century, but I would be satisfied if they merely left out just-so stories claiming to be economic fact.

  Aaron Brown is a former head of financial market research at AQR Capital Management. He is also an active cryptocurrency investor and has venture capital investments and advisory ties with cryptocurrency firms. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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