The New Deal Counter-Orthodoxy

Amity Shlaes, author of the controversial best-seller The Forgotten Man: A New History of the Great Depression, in a Forbes column does a good job with a quick journalistic overview of some of the Great Depression theories that counter the "FDR saved us all with bold, persistent experimentation and a very convenient war" theory. Some big points:

…Public Choicers would say that the 1930s story was also the story of a power struggle between public and private--and one in which the public sector gained ground. This clearly was true for the growth industry of the day, utilities. Scholar Robert Higgs holds that the very unpredictability of the government chilled markets, and this idea--what Higgs calls "Regime uncertainty"--is borne out by the data. The 1930s stock market is famous for its drops, but its second outstanding aspect is actually rallies, specifically micro-rallies of 10% or more. In other words, the abiding feature of the market was its volatility.

Another applicable theory, one stressed by [Benjamin] Anderson [economist at Chase Bank during the Depression], is old-fashioned classical economics, which looks at supply as well as demand. What Anderson saw was that businesses forced by New Deal policy to pay wages higher than they could afford struck back by hiring fewer workers.

The takeaway from the newer research is important because it is optimistic. [1920s Treasury Secretary Andrew] Mellon irritated New Dealers precisely because he made clear that their government intervention was not necessary to perpetuate American growth. If we understand our own downturn correctly, and promulgate wiser policy, this downturn too still has a chance to prove itself a mere "bad quarter-hour."

Nick Gillespie interviewed Shlaes in Reason magazine's January 2008 issue.