Wednesday, April 01, 2009

The “Great Recession” as the Institutional and Ideological Residue of the Great Depression

Economist Steven Horwitz gave a talk on The “Great Recession” as the Institutional and Ideological Residue of the Great Depression at Georgia State last month, and it is excellent. I recommend reading all of it. There are a couple of quick excerpts that give a flavor:
Let me say a quick word about what didn’t cause this mess. Those who wish to blame greed for the crisis need to explain how and why it is that greed seems to causes crises only at specific times, despite the fact that it is omnipresent as a feature of human nature and market economies. As the economist Larry White has noted, if we saw a bunch of planes crash all on the same day, we wouldn’t blame gravity. It’s always there. Something else must be at work. I would argue that the key is the set of institutions through which greed or self-interest is channeled. That is, good institutions can cause self-interest to generate desirable unintended consequences, and bad ones can cause undesirable ones. So perhaps we should be looking at institutions and policy.

Those who wish to blame deregulation or the supposed “laissez-faire” philosophy of the Bush Administration are going to have to identify the deregulation in question, which will be a challenge given that the last deregulatory legislation in the financial industry was in 1999 under Clinton. These folks will also have to explain how the enormous growth in the Federal Register and domestic spending over Bush’s two terms reconciles with his supposed belief in laissez-faire. Answer: it doesn’t.
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The response by both the Bush and Obama Administrations over the last six months or so has been a series of government programs, few of which seem to have been very helpful. Let me start this discussion with a challenge laid down by economist Bryan Caplan: “Suppose for the last six months both administrations had responded to the crisis by adopting a strong laissez-faire position. On 9/3/08, the Dow stood at 11,533. Monday it was around 7300. Unemployment has gone up by 2 percentage points. Does anyone think that laissez-faire as a policy would not have been absolutely savaged by the media and others given the economy’s performance since then? If not, then why haven’t we rejected the activism as vigorously, given that performance?”
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What we are living through today is a recession whose causes are significantly the unintended result of institutional changes made during the Great Depression and whose proposed solutions reflect the same failed understanding of the causes that motivated Great Depression “solutions” that largely ended up doing more harm than good. History is indeed repeating itself, and not in a good way.

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