Revisiting the Great Depression
5th January 2016
Arnold Kling reviews Scott Sumner’s book The Midas Paradox.
The Great Depression of the 1930s is one of the most significant events in economic history. It had an impact not only on the people who lived through it but on economic theory and policy all the way to the present. I believe there is a strong case in favor of requiring every economics graduate student to take a course on the Great Depression. Furthermore, the reading list for such a course definitely ought to include Scott Sumner’s new book,The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression.1 Its title pertains to the role that Sumner assigns to gold hoarding in triggering the Depression.
Arnold is a Really Smart Guy and a Real Economist, so what he has to say is well worth hearing. My interest was sparked by his affirmation of the damaging effects of the Aggregation Fallacy, against which I have preached much in this blog.
In my own somewhat idiosyncratic opinion, where macroeconomic thinking goes wrong is in treating the entire economy as if it were a single firm. This limits the possible margins of adjustment in the economy to crude aggregates, involving “the” real wage and “the” level of employment. Instead, I think it is important to remember that economic activity is divided into millions of different specialized tasks, and that most of the shocks to which the economy must adjust are localized shifts in relative demands and supplies. These take place as consumers change their tastes, entrepreneurs introduce new products and production processes, and the Schumpeterian process of creative destruction plays out.