For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.
At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.
I did not notice this article when it first came out. Instead, I was motivated to look for it when I saw that Stiglitz’s new book is a collection of reprinted articles. I looked for this article because of what I found in David Rotman’s article in Technology Review,
In his new book, The Great Divide, the Columbia University economist Joseph Stiglitz suggests that the Great Depression, too, can be traced to technological change: he says its underlying cause was not, as is typically argued, disastrous government financial policies and a broken banking system but the shift from an agricultural economy to a manufacturing one. Stiglitz describes how the advent of mechanization and improved farming practices quickly transformed the United States from a country that needed many farmers to one that needed relatively few. It took the manufacturing boom fueled by World War II to finally help workers through the transition. Today, writes Stiglitz, we’re caught in another painful transition, from a manufacturing economy to a service-based one.
This is a PSST story. However, unlike me, Stiglitz thinks that more government spending is a solution for unemployment caused by structural change. Put people to work producing useless munitions, and next thing you know the structural problem is solved. Instead, my view is that between 1929 and 1946 a whole lot of workers with obsolete skills (not just in farming–some types of manufacturing were disappearing, also) aged out of the labor force. The workers that entered the labor force were better educated, and they ended up working the expanding white-collar sector.
I think that the main contribution of World War II was to put people in motion. Soldiers who had gone overseas did not go back to places where there were no jobs. Instead, they went to where there was opportunity. Women and African-Americans were more mobile during the war than they had been previously.
Greater agricultural productivity forced some agricultural workers to find other work. But the improvement in agricultural productivity was a gradual, long-term process; why did it produce a sharp break in the economy just in 1929-32? The economy had been adjusting to greater agricultural productivity for decades, mostly without agony. And the depressions/recessions that did occur before 1929 cannot plausibly be blamed on agricultural productivity; why is 1929-32 different?
This comment is spot on. In addition, the Depression was a global phenomenon. What explains the economic collapse in Europe which did not go through such an agricultural revolution?
Sorry, Europe did go through it too. Competitive forces and global markets ensure that developed countries stay very close to the cutting edge and that advances in agricultural total factor productivity spread very fast.
For instance, the famous ‘Sunshine Harvester” – the first commercial combine dating from 1885, was from Austrlalia, but of course everyone was using them right away.
I don’t have a good chart for the half-century period in question (1885-1935), but I do have one from 1961-2006, and you can see that developed Northeast Asia, Europe, and North America seem to stay pretty close to each other throughout the period.
But the share of the labor force in agriculture was much smaller in Western Europe than it was in the United States so the productivity “shock” – if there was one in Europe – had much smaller ramifications. Attempts to explain the great depression based on “real” as opposed to “monetary” and “financial” shocks have a difficult time. Why did the Netherlands and Belgium, hardly agricultural economies, suffer so much only to do better once they left the gold standard?
Nope. Here’s a historical chart of Max Roser’s data of “share of the labor force working in agriculture, 1300-2012.”
You can see that, while the countries were at different levels of development, in the 50 years from 1885-1935, England, Netherlands, France, Italy, and Poland all experiences rapid reductions in their farming share of labor. Eyeballing it, I’d say the range was between a third and a half of the labor share lost over that period.
Even France and Italy had nearly 4 out of every 10 workers on the farm at the beginning of that era, when they were some of the most developed Western countries and major world powers.
It was a global revolution in work: slow but steady, and fast enough to be disruptive. Now we’re having another one.
I make the same argument in my book for 18-year olds, entitled ‘Your Future Job: Building a Career in the New Normal.’ But I credit it to Arnold Kling.
You can find it on Amazon here: http://www.amazon.com/Your-Future-Job-Building-Career-ebook/dp/B00ZMCCMPC
If you know somebody who is thinking about, or just starting college, this book is for them.
“Soldiers who had gone overseas did not go back to places where there were no jobs.”
This is a key, fundamental point. Do you have specific statistics or evidence of the magnitude of mobility? Has this point already been analyzed elsewhere? I would love to see this argument elaborated and suppored with empirical evidence.
Alexander Field made the “radical but under-reported technological revolution in the early 20th century” argument in A Great Leap Forward, 1930s Depression and U.S. Economic Growth. In other words, ‘causal density’.
The argument I made earlier attributing The Great Stagnation, The New Commanding Heights, and persistently low interest rates to The Great Reset is very similar to this ‘technological-determinism’ story.
The key observation is that continuously improving automation had led to manufacturing going the way of agriculture in terms of the shrinking portion of the (global) labor force required to be employed to produce more than enough for everybody.
On the one hand, at least ‘production wealth per capita’ is high enough and redistribution already robust enough that the transition will be mostly comfortable for most people. No Great Depression-like starvation or exposure, homelessness, etc. – just ‘first world poor problems’.
On the other hand, this time will be even more economically disruptive than the last, because agriculture had manufacturing to soak up the labor force in other goods-producing activities, but manufacturing can’t have anything like that, so the transition is to an almost all-services economy, which will probably look more like Downton Abbey.
Internet services replace formerly human intermediaries in a way that is immediately infinitely scalable and has effectively zero marginal cost. Also, since global transport, information storage, and bandwidth is cheap, anything with a significant labor component that can be outsourced to a place with cheaper average labor costs will be.
The big question is, “What is the character of those activities that remain?” and the follow-up question is “What does that imply for labor increasingly concentrating in major urban hubs, real estate prices, and interest rates?”
My answer is “Non-outsourceable, non-automatable services that have to been done by human for other humans in close proximity.” That’s health-care, education (so far…), government (aka, “The New Commanding Heights), and a lot of ‘medium-to-strong-AI’ but low-skill, low-pay ‘servant-like’ activities, like driving Uber cars, making deliveries, maid-service, hair-cuts, waiting and busing tables and cooking affordable food. There are also a few lucrative jobs in management and creative-class jobs that require lots of team-work interaction and coordination, for instance, in engineering and programming.
But as a result, companies must centralize their operations to keep all their domestic (developed country) creative workers in one place to collaborate and coordinate, and they must also co-locate with other companies and government headquarters to easily coordinate with the other entities in the ecosystem.
That means almost all lucrative employment that isn’t artificially maintained in some location by government fiat will centralize into hubs, and because these workers have to live in these places if they want that kind of work, they will have no choice but to bid up real estate prices to the sky, eating up all their surplus.
We are going through the slow attempts to discover solutions to a radical recalculation problem, but the old ‘blue social model’ was built on the now obsolete assumptions of the post-war period (“the heyday of the everyman”), and has introduced rigidities in politics, law, and attitudes that are difficult to overcome.
I agreed with all of that up until the centralization part. Modern technology and transportation should and already has to some degree obviated the need for organizations to maintain centralized operations. I’m also skeptical about real estate prices seeing high inflation for the same reason, no to mention the fact that as people shift into lower wage service occupations, their ability to bid up real estate prices is going to grow more and more limited.
If anything, I’d expect real estate prices to fall in most places. As technology turns more and more people into Zero MP workers, there will be less reason for them to hang around expensive cities. What dollars these people do have will go a lot further in Lynchburg than they will in Arlington.
This one is simple – there wasn’t enough gold in the world to serve as bank reserves, as it had prior to the Great War. The US was the only member of that war to stay on the gold standard and by 1919, the price of gold was twice what it had been before the war. This caused a severe contraction in the economy in 1920 and 1921. A summit of central bankers was held in Genoa in 1922 and it was determined that the European banks would use dollars as reserves, as there wasn’t enough gold, and that when the UK rejoined the gold standard, sterling could also be used.
The UK tried to get back in 1925 – and the high price of gold did the same damage to them. France looked at the UK, and didn’t understand that the problem was GOLD. And ordered her banks to begin using gold as reserves, in 1928. 1928 was also the year that gold production fell off a cliff in South Africa.
A little agricultural economic history. Ag commodity prices skyrocketed during WW I and at the same time there was a lot of ag mechanization breakthroughs diffusing through the ag economy. It was a “high tech” boom.
The high grain prices pumped a ton of money into the U.S. ag sector. A lot of farms bought out their neighbors and took on a lot of debt during the boom when land prices were highest. Grain and land prices tanked after the war and the ag economy struggled but with higher debt than before the war.
While the stock market was roaring in the 1920s, farmers struggled and were remembering the war years as the good old days.