What is “Pre-History” and Does It Have Any Value?

When I was in school, many subjects had some history to them.  But the time span of history tended to vary with the subject.  For those studying geology, for example, history started with the formation of the earth.  In my high school history of America class, history started around 1776 with the U.S. Revolutionary War.  Although there was probably some reference to Chris Columbus and 1492 voyage, the period between then and 1776 did not get much attention – it didn’t seem to count for much.  In college, as an undergrad, my History of Western Civilization class started history about a 1000 or more years sooner than the high school U. S. course.  It may have started as early as the Roman Empire, but we spent most of our time on the centuries that followed that.  In grad school, the economics classes seemed to date history from the 1930’s and the Great Depression.  One might think that economics started with the Roosevelt New Deal and the Publication of John Maynard Keynes theories in the late 1930’s.  Actually the subject of Macro-economics may have started then. While there may have been some reference to Adam Smith whose major work was published, interestingly enough, in 1776, there seemed little doubt in the economics department that the important ideas started in the 1930’s.  There have been many studies done concerning the Great Depression and Keynes work was published in the later half of the 1930,s.  The study of Micro-economics was not particularly useful or so I was told by one professor that I liked.

So who knew that anything that happened during the roaring 20’s was worth studying? There was some mention in most discussions of the Great Depression of things that may have led up to the market crash of 1929, but not much about the 1920’s before that.  And the popular history called the decade the “roaring twenty s” – it was boom time!  So who knew that there was a depression early in the 20’s? But a couple of weeks ago, syndicated columnist Robert Samuelson had a piece in our local news paper about an impressive economic downturn that happen at the beginning of that decade.  He reports that before the bust GM sales were averaging 52,000 per month, but by January of 1921 they were down to 6,150 per month.  The unemployment rate was up between 15 & 16%.  The average price of the 10 leading farm crops had dropped by 57% and farmers could not repay loans.  When President Warren Harding took office in March 1921, there was “anguish and anger” over the unstable economy which had gone “in the span of three years from an inflationary boom to a deflationary bust”.  Who knew?  The first Great Depression was in the early 20’s – the “Roaring 20’s”.  Part of the reason we may not know about this one is because the economy recovered quickly and the government wasn’t involved.

Samuelson says that James Grant – a respected financial commentator – has written a book, “The Forgotten Depression” , which attempts to explain why this depression recovered so quickly, especially compared to the one in the 30’s.  His main thrust, is that free markets may have more serious drops, but quicker recoveries.  Samuelson reports that he writes; “The hero of my narrative is the price mechanism. …In a market economy, prices coordinate human effort.  They channel investment, saving and work…when they became low enough to entice consumers into shopping, investors into committing capital and employers into hiring” things picked up and the “economy righted itself”.  Grant argues that in the Great Depression of the 1930’s the downward rigidity of wages prolonged the great depression.  He concedes that the laissez-faire approach might result in harsher recessions but it would produce stronger, quicker recoveries.

Samuelson thinks that until the recent Great Recession, Grant’s idea could be easily disputed, but with the recent financial crises “it is no longer possible to be so dismissive”. With the unpredicted slow recovery, “old ideas” need to be rethought.  Since the 30’s we’ve expected governments to do things to get us out of the doldrums.  Samuelson says that “these understandable impulses (by government) may compromise the economy’s recuperative rhythms.”  So what do you think, can we learn anything from the 20’s or is that “pre-economic- history that is not relevant to today’s world?

My opinion is, and has been, that a free market economy has a lot of feed back control loops.  That left alone, in most cases, it can recover without help.  I also believe that there is some validity to Keynes theories.  If done judiciously, Keynes theories could no doubt smooth out some bumps in the road.  However, there are many variables that affect economic activity, and there may be few “consistently independent” variables.  There are a lot of mutual dependencies.  The ones that the government has control over, may be limited in their ability to help to a few non severe conditions.  There was another article in the paper written by a Bloomberg columnist that opined that the movement of some of the variables that the government monitors may be good or bad depending on what caused it. All of this makes it difficult to know what should or should not be done.  And timing is critical.  The seemingly right thing done at the wrong time can make things worse.

The best idea that I remember from my graduate school days was the idea of the “full employment” budget.  The idea was to set the Federal budget to be balanced with the amount of taxes that would be expected to be received at a full employment economy,  but in case of recession, the budget would not be changed and any deficit at that point would be helpful.  This would take reaction by the executive branch or the congress out of the equation, and would make any government stimulus part of the automatic system.  What the government is doing can change the way people respond. Unlike inanimate physical systems, people do not always react the same way to changes in the same variable.  In the recent situation, we would not have a balanced budget even when we had a full employment economy.  So there is some built uncertainty about future stability when things get worse.  This can change people’s reactions to changes in some of the variables.

The idea that government could or should be in charge of the economy has its own pitfalls.  How successful the government reaction was in the 30’s has been the subject of much debate.  But the Keynes theories seem to support what the government did, and started the field of Macro-economics.  It also caused people to expect the government to do something to “save us” and elevated the standing of economists.  Economic academics all of a sudden became advisers to senior government.  They got quoted in news articles and had a chance to become famous (if not rich).  A heady environment.

Maybe we would be better off if we let the system correct itself and kept government action on the sideline.  Maybe we are capable of helping ourselves.  What do you think?

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
This entry was posted in Business, Economics, Education, History, Social Problems, Uncategorized and tagged , , , , , , . Bookmark the permalink.

One Response to What is “Pre-History” and Does It Have Any Value?

  1. Bob says:

    I agree.

    Does anyone besides me ever comment?

    Bob

    Like

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