Are We Looking at the Wrong Depression?

March 2, 2012

In order to understand the current economic stagnation, decision-makers are increasingly looking to economic history to offer some guidance.  Many make immediate comparison to the Great Depression between 1929 and 1932 and call for the same Keynesian solution now that was implemented then.  However, there remain crucial differences between the current financial crisis and the Depression, says Stephen Davies, academic director at the Institute of Economic Affairs in London.

  • Unlike the 1930s, there has not been a substantial fall in general prices; in fact, prices in certain sectors such as food and fuel have actually spiked.
  • While in the Great Depression the contraction was global and nearly universal in its impacts, the current downturn has been fairly weathered by much of the developing world, and the global economy as a whole has continued to grow.
  • The level of unemployment is far more moderate now than it was then.
  • So far there has not been the kind of sharp and sustained decline in world trade and economic activity that happened after 1930.

This suggests that comparisons between this downturn and that one are misleading, and that prescribing solutions based on their efficacy in the previous crisis is misguided.  Rather, economists should point decision-makers to the "Long Depression," which lasted from 1873 to 1896, as it bears much greater resemblance to the current situation.

  • The Long Depression was sparked by a global financial panic in 1873, which arose from the bursting of several speculative bubbles, particularly in railroads and real estate.
  • The level of unemployment and economic disruption is much more in line with what the United States and Western Europe are currently experiencing.
  • Technological innovations contributed to the economic upset: though they benefited society as a whole in the long run, their improved efficiencies created a need for labor readjustment and movement that upset the status quo.

This final point is crucial in creating policies for the current recession.  Policymakers should avoid drastic measures and significant fiscal expenditure to combat what appears to be a persistent dearth of demand.  Rather, they should draw comparisons from the Long Depression and recognize the current crisis for what it is: a gradual realignment of labor in response to technological innovations.

Source: Stephen Davies, "Are We Looking at the Wrong Depression?" Freeman Online, March 2012.

For text:

http://www.thefreemanonline.org/columns/our-economic-past/are-we-looking-at-the-wrong-depression/

 

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