Storytime with Joseph Stiglitz
Arnold Kling points to an article in which famous economist Joseph Stiglitz lays out a theory for a common structure for the causes of the Great Depression and what Stiglitz calls the current Long Slump.
Here is what Stiglitz has to say:
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.
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.
He then goes on to describe how this problem propagated through the rest of the economy.
It’s interesting that in the first paragraph Stiglitz specifies that “more than a fifth” of all Americans worked on farms at the beginning of the depression, and that “2 percent” do today, but makes the non-numerical statement that “a large portion” of the population did so in 1900. I assume this would tend to lead most casual readers to think that most workers were on farms at that time. In fact, about 34% of the American labor force was in agriculture in 1900, and about 21% in 1930.
The proportion of Americans working on farms has been in continuous decline since at least 1800, when about three-quarters of the labor force was in agriculture. The decade with the biggest reduction in this proportion appears to have been the 1840s, when the percentage of the workforce in farming went from 67.2% to 59.7% (a reduction of 7.5 points). The rate of reduction from 1900 to 1960 appears to have been between 4 and 5 points per decade. As far as I can tell, this was roughly the rate of reduction from about 1860 – 1960.
The Great Depression occurred around the middle of a century-long, steady decline in the percentage of the labor force on farms. How could this decline have been the special cause of a spectacular economic collapse that occurred in one of these ten decades, but in none of those before or after?
(Cross-posted to The Corner)
The obvious answer is that the internal dynamics of the system matter, and the response of the system is not always simply proportional to changes in parameters.
For example, if I take a glass of water at room temperature and start removing energy from it at a constant rate, the temperature of the water will drop proportionally until it reaches the freezing point. At that point it will undergo a phase transition (i.e. freeze) and the temperature will remain constant even as energy continues to leave the water. Once the phase transition is complete, the temperature will continue to drop as more energy is removed.
So if the increases in productivity and decrease in agricultural employment caused a kind of phase transition in the economy, it’s quite possible to see exactly the sort of phenomenon Stiglitz is writing about. Of course this idea needs to be fleshed out, but it certainly seems plausible to me.
— Chris · Dec 16, 05:08 PM · #
Chris,
You make fair points. I agree that it’s possible for this to have been a causal factor, but Stiglitz makes a bald-faced claim that simple supply and demand of farm labor “more than anything else” caused the Depression. He doesn’t say that it was mulit-causal (though I’m sure he believes that it was to some extent), or that we had somehow reached some critical threshold, or anything else. His evidence is just the laws of supply and demand. If his claim is correct, and his evidence is valid to support it, then why could the exact same evidence that he marshals be used to explain why the Depression happened in 1920, 1940, 1950 or 1960?
— Jim Manzi · Dec 16, 05:50 PM · #
I don’t really want to defend his argument (I’m not an economist in any case), but it seems to me that he does identify a critical threshold: “Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply.” The threshold would be that at that moment in history food production exceeded demand by a sufficient amount to cause a sharp, sudden price drop. So I guess one piece of evidence I would look for through the decades is the food price data. If his idea is correct, then I would expect food prices to be relatively stable (with fluctuations, of course) before 1928, even as the percentage of workers in agriculture is steadily declining, then drop rapidly and stay low around the onset of the depression, then stabilize again sometime later. Of course none of this is conclusive, by any stretch. You could also look at how food production numbers change over time, how consumption changes, population changes, etc.
— Chris · Dec 16, 06:38 PM · #
The conventional wisdom in the 1930s was that the Depression was caused by “overproduction” — I was just reading some mid-1930s journalism by Winston Churchill which included a reference to the overproduction explanation of the Slump as something that everybody knows is true. So, this is pretty much the same idea that’s been around for 80 years.
Thus, FDR’s initial economic policy was borrowed from Mussolini: organize cartels to reduce production and raise prices. That was shot down by the Supreme Court in 1935, so FDR moved on to welfare state reforms like Social Security, which were a pretty good idea but had only long run effects.
— Steve Sailer · Dec 16, 10:36 PM · #
Farmers had been famously hurting throughout the 1920s. My 7th grade U.S. history textbook singled them out as not participating in the boom going on elsewhere in America. This wasn’t that big of a deal at the time because there were so many opportunities opening up in urban economies in manufacturing, finance, and real estate. But there was an overshoot as animal spirits got out of hand, and a subsequent correction. The big mystery is why the initial slump went on so long and why there was a second one in FDR’s second term.
— Steve Sailer · Dec 16, 10:41 PM · #
Farmers had been famously hurting throughout the 1920s. My 7th grade U.S. history textbook singled them out as not participating in the boom going on elsewhere in America.
Part of this was due to declining farm commodity prices after the war. This tends to happen after wars. See this chart of commodity prices (not just farm prices — I wish I could find a chart like that for agricultural commodities). The duration varies, and WWII seems to be somewhat of an exception, but you can see a slump after the War of 1812, after the U.S. Civil War, and after WWI.
I’m glad Mr. Manzi pointed out that the decline in the portion of the population working on farms has been on ongoing process going back to at least 1800.
BTW, one of my favorite tropes that I probably haven’t inflicted on this forum lately is that agricultural subsidies are the root of all evil. At least they are in most industrial welfare states. It’s important for the success of a welfare-police state that the agriculturalists be kept meek and subservient. Stalin did it by murdering the kulaks. FDR did it by turning them into welfare queens. If we eliminated this form of welfare for the rich, we’d be able to reform the rest of the corrupt system. But with these ag subsidies firmly in place, the left’s hegemony over our socio-economic system is secure.
— The Reticulator · Dec 17, 07:08 AM · #
Title-> Ready to Move SG Impressions Plus NH -58 call@ 9999008503 Ghaziabad.
Descriptions->
SG Impressions Plus
Great location plus great price
Ghaziabad is the ultimate destination for people desirous of settling in Delhi and NCR. It has become one of the favourite destinations for living, due to its easy accessibility from the capital and other suburbs. Ghaziabad is Delhi’s only natural neighbour that has maximum number of entry and exit points with the national capital, as compared to the NCR regions of Noida and Gurgaon. With the proposed Metro Station, World-Class Infrastructure, Residential and Commercial Complexes, Shopping Malls, Multiplexes, Schools, Hospitals, Community Centre, Parks, Shopping Centres and other luxuries of modern living, Ghaziabad is fast becoming the choice of upwardly mobile families. Located 15 Km from the Central Business District (CBD), Ghaziabad has a housing population of almost 10 lakh that is reportedly projected to go up to 15 lakh by 2011. This erstwhile industrial area is now mushrooming with residential apartments. To acknowledge the authority’s efforts, the Newsweek has rated Ghaziabad amongst the top 10 dynamic cities in the world in 2006.
Keywords-> SG Impressions Plus, Ready to Move SG Impressions Plus, SG Impressions Plus Ghaziabad, Ready to move Raj Nagar Extension, Ready to Move Raj Nagar Flats, SG Impressions Plus, SG Estates, Ready to Move Raj Nagar Extension nh 58, Ready to Move NH 58
http://sgimpressionsplus.in
— shaswat · Dec 17, 10:07 AM · #
Jim manzi,
This is of topic, but have you read this: http://www.nytimes.com/2011/12/17/science/earth/warming-arctic-permafrost-fuels-climate-change-worries.html?_r=1&hp
— cw · Dec 17, 08:38 PM · #
I meant to type “off” topic.
— cw · Dec 17, 08:42 PM · #
Are you suggesting that 13% of the entire American labor force leaving agriculture over 30 years isn’t a fundamental restructuring of the economy? Also, is there an argument behind citing that this also happened in the 19th century?
— Michael · Dec 19, 11:27 PM · #
Are you suggesting that 13% of the entire American labor force leaving agriculture over 30 years isn’t a fundamental restructuring of the economy? Also, is there an argument behind citing that this also happened in the 19th century?
Good grief. If my eyeballs roll out of my sockets, I know who to blame.
A good part of the world during all this time has been in the middle of an industrial revolution — which included a revolution in the tools and technology used to grow food. THAT is what we call a fundamental restructuring of the economy.
Picking on thirty years worth of a continuous process going on for nearly two centuries because it happened to coincide with one of the depressions that occurred during those two centuries, and calling that portion of the trend and only that portion a fundamental change, shows a lack of perspective, to put a charitable construction on it.
If we’re not going to learn any better than that, we may as well shut down the history departments in our schools and save a bundle of money.
— The Reticulator · Dec 20, 04:35 AM · #
Do you know what I have been reading lately, Dr. Manzi?
An old book with a new edition.
i highly recommend it.
Is it time for escape from Distibuted Jesusland for the rest of us yet?
I mean, you got yours……you are in France.
;)
— matoko_chan · Dec 20, 11:21 AM · #
When looking at the effects of economic changes, I believe it helps to examine the effect of changes in power between different groups, because negotiating power sets prices. In this instance, I would argue the specific changes we see between 1910 and 1940 that tipped the balance of power involved changes in food preservation technology. In economics, to a considerable degree, time translates to power; the negotiating party that requires goods and services today faces a considerable disadvantage against a partner who can delay. Historically, farmers had and advantage over city dwellers, because the cities needed food on a regular basis, while the farmers could let their land grow fallow for a season. Food preservation technology tipped that balance by allowing the cities to tap food sources farther away in time and space, thus eliminating a negotiating advantage of farmers. In the period leading to the depression of the nineteen thirties, food preservation had made considerable progress; Clarance Birdseye patented a method of freezing food in 1928, and a decade earlier the First World War had stimulated the canning of a considerable variety of food stuffs.
— John Spragge · Dec 20, 03:51 PM · #
Historically, farmers had and advantage over city dwellers, because the cities needed food on a regular basis, while the farmers could let their land grow fallow for a season. Food preservation technology tipped that balance by allowing the cities to tap food sources farther away in time and space, thus eliminating a negotiating advantage of farmers.
That kind of change was going on for at least two generations prior to 1910. It played a big role in the farm protest movements of the late 19th century, from the Granges to the Farmers Alliances, to the Populist movements. It played out differently with different food products. The Farmers Cooperative movements were a lot more successful with dairy products because butter and milk were perishable; thus farmers could exert more control closer to home and get a better bargaining position.
— The Reticulator · Dec 20, 06:01 PM · #
John,
Like Chris’s more abstract version of this kind of point, such a thing is certainly at least plausible. My point in the post (and I should have written it better) is not that Stiglitz is certainly wrong, but that he doesn’t make the argument that he needs to make – to wit, what distinguishes the specific decade of the 1930s from the ten decades around it that were characterized by the same set of facts that he says caused the Depression. Maybe it was some kind of a tipping point, but he just ignores the question, doesn’t inform his readers of what seems to me to be an obvious question, and uses language that moves the reader’s eye away from, not to, the problem. This strikes me as just rhetoric.
— Jim Manzi · Dec 20, 07:26 PM · #
Jim, you were clear about what you were saying about a tipping point. If Stiglitz wants to cite the tipping point of a long-term trend as a cause, he needs to talk about the tipping point at least as much as the long-term trend. And it isn’t good enough to say X could have happened in 1930. There are biblical Creationists who take that approach — saying, for example, that fossils could have been caused by X, and then going away quite satisfied with their line of reasoning. Which is not quite the same as examining what actually did happen.
BTW, if anyone here is interested in learning more about the topic of the commoditization of agriculture in the late 19th and early 20th centuries, I recommend a book that I read several weeks ago: “Cooperative Commonwealth: Co-Ops In Rural Minnesota 1859-1939” by Steven J. Keillor (2000). Amazon link here
I got interested in it after one of my best bike rides of this last summer — a visit to the Minnesota town where I had graduated from high school. In the interest of offending those who are easily offended by self-promotional links, my blog articles about it are here: Henning, MN, That Unsavory Sheet, Allowed it to Wither and Fourth of July in Henning
After looking up the Amazon link for Keillor’s book just now, I was reminded that when I first picked up the book I had noticed that the spelling of the author’s surname was the same as that of a famous Minnesota personality. When I learned a few minutes ago that this Keillor is teaching at Bethel College in St. Paul (just down the street from where I got my undergraduate degree) and saw the titles of some of other books, and then thought some more about his photo, I decided to look to see if there is a family connection. The answer is yes, this Keillor is a brother of the Garrison Keillor on NPR whose political views are rather shallow but who does an entertaining radio show.
I think I read one of Garrison’s books once, but don’t recall whether I made it all the way through. I was not particularly impressed. Good radio guy (I’ve been a fan ever since he got started at St. John’s, Collegeville) but a mediocre writer. His brother may be the more interesting writer. That may be in part because Steven J.‘s work is not fiction. I’ve read only Cooperative Commonwealth so far, but based on that would like to try out some of his other works.
— The Reticulator · Dec 21, 12:32 AM · #