The Great Depression
Prior to the Great Depression the economy was not always considered to be a responsibility of government. After the Great Depression, economic management was almost universally a government responsibility. In effect, under pressure from their citizens, governments took on a responsibility for avoiding something that they did not know the cause of.
The Great depression provides a clear example of the destructive impact a dysfunctional economy can have. As a major historic event it is widely documented. The following extract is from Wikipedia:
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1930 and lasted until the late 1930s or middle 1940s. It was the longest, most widespread, and deepest depression of the 20th century.
In the 21st century, the Great Depression is commonly used as an example of how far the world’s economy can decline. The depression originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday).
The Great Depression had devastating effects in countries rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.
Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most. Some economies started to recover by the mid-1930s. In many countries, the negative effects of the Great Depression lasted until the end of World War II.
It is widely acknowledged that leading up to the Great Depression there was significant improvement in productivity due to electrification, mass production and motorization of transport and farm machinery. This changed the relative value not only of the items being produced, but also those involved in the production and supply of the alternatives. An example of this is when the motorization of farm machinery directly replaced the use of horses and physical labour. Indirectly the replacement of horses (in cities as well as on farms) also reduced the value of horses and the demand for their feed crops. Similarly the reduced need for labour on farms resulted in the displacement of rural families and reduction in the size of rural communities – which in turn reduced the demand for housing in rural towns and for rural businesses and subsequently the value of town property. To understand the contextual significance of this disruptive impact on the agricultural economic ecosystem, it is important to understand that in 1930 agriculture was the largest employer, with one in four Americans directly working in agriculture and many more working in rural communities. For the individuals involved this also changed what they valued, transitioning many of them down the hierarchy of need from pursuit of happiness, into seeking stability, and for some plummeting them into a search for survival. This in turn changed their trading habits and as they were a substantial part of the economic ecosystem, it also redefined the broader economic ecosystem.
People in other industries were also impacted by a range of disruptive technological advances and changes during the same period, particularly in heavy industry. As many of these advances required fewer workers, there was widespread displacement. By modern standards people were also far less educated or geographically mobile, making a transition to other employment, if it existed, difficult. Within any ecosystem there is a tipping point when the degradation of one sector will spill over into the degradation of the whole. The tipping point for the Great Depression occurred in late 1929.
To reverse the degradation of an economic ecosystem is difficult. One of the first casualties of economic disruption is money. Money as the catalyst for trade is an essential part of a healthy economy, and when there is a down turn, people rush to withdraw their funds from banks, (and shove it under the proverbial mattress). At the same time, those who have fallen down the hierarchy of needs, and some who have not, try to be far more self-sufficient. This reduces the level of trade and slows the economy further, and this spiral feeds on itself until a new equilibrium is reached.
So what should a government do when it is facing a disruptive technology impacting on an industry that is also a major employer?
Often the first response to this situation is to try and protect the industry from the change. In the decades since the Great Depression, various governments around the world have propped up and protected industries in various ways. However this is not a sustainable solution. The economics of most reward for least effort always wins out in the end.
A more practical long term solution is to assist those displaced by the disruptive technology to re-skill, or relocate, or both. To do this effectively requires some understanding of appropriate long term alternatives for the individuals involved. Ideally this process should also produce something of value to the community. The major infrastructure projects implemented by governments in the US and elsewhere in the late 1930s, are often credited with starting this process. The involvement of many people in the war effort during the Second World War, was also a major contributor to the re-skilling and relocation of the workforce in many countries. Subsequently the nature of the US workforce and its economic capability was starkly different in 1950 compared to 1930.
Recap
- Reward for effort – efficiency gains of technology change the equation
- Value is relative – optimism to pessimism, a widespread change in mindset and/or circumstance changes the nature of the economic ecosystem
- Trade requires difference in value – when self-sufficiency is valued higher than trade, then trade slows; when tomorrow’s money is valued more than today’s (depreciation), then trade slows even further.
- Money is a catalyst – when the money supply is reduced there is insufficient catalyst for trade to occur at a natural rate, this changes the relative value of money and slows trade further.
- Trade creates economic ecosystems – when individuals, groups and governments choose to be more self-sufficient, trade is reduced. Subsequently there are fewer trading partners with isolationist or protectionist policies reducing the economic ecosystem and its effectiveness.
- Economic measurements are incomplete – move to self-sufficiency overstates the reduction in economic activity as a higher portion of the economy goes unmeasured.