Tuesday, September 25, 2012

Another Austrian Fable

I refer to the last statement made by Robert P. Murphy at the end of this post:
Robert P. Murphy, “There’s Really Been a Lot of Real Shocks to the Economy,” 24 September, 2012.
Here is what he says:
“And–if I might be even bolder–maybe all of the crazy things FDR did under the New Deal explain the length of the Great Depression, as opposed to ‘tight money’ (even though the US went off gold in 1933, and we never had a depression as long under the gold standard as we did after we went off it).”
Notice how this statement depends on a loose definition of the word “depression” to include not just a period of real output collapse, but its aftermath. If we define “depression” as GDP contraction and its aftermath with high unemployment, then the 19th century had two serious “depressions”: the 1870s and 1890s, for example.

According to the data from Davis’s (2004) industrial index, the US had a recession from 1873 to 1875 lasting less than 3 years, but then an aftermath of continued, rising unemployment right down until 1878. The 1890s saw a double dip recession and rising unemployment until 1898. In one important respect, both these decades were worse than the Great Depression, because in the 1870s and 1890s unemployment continued to rise even after a recovery began. By contrast, at least unemployment started falling in 1933 (and subsequent years) when the recovery from the Great Depression occurred.

In economic literature, however, one will find a useful definition of “depression” as a contraction of 10% or more in the value of real output (or real GDP/GNP). Even the Economist informs us that there are “two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years.”

By this definition, America had a depression from 1929–1933. The depression – that is to say, the real output contraction – ended in 1933, and what followed was its aftermath: a period of high, but falling, unemployment and recovery, where there was real output growth.

And, by the same definition, it is patently absurd to blame Roosevelt for what happened from 1929 to March 1933 (when the actual depression occurred), since he was not even inaugurated until the later month and year.

It also equally absurd to invoke the gold standard. The US abandoned the gold standard in June 1933, and after this experienced a period of recovery. The US had the worst depression in its history while it was on a gold exchange standard.

What happened after Roosevelt was inaugurated and in the years when he turned to moderately expansionary fiscal policy? Both real GDP and real per capita GDP grew and expanded at quite high rates historically, as we can see here:
Year | GDP* | Growth Rate
1929 | $977,000
1930 | $892,800 | -8.61%
1931 | $834,900 | -6.48%
1932 | $725,800 | -13.06%
1933 | $716,400 | -1.29%
1934 | $794,400 | 10.88%
1935 | $865,000 | 8.88%
1936 | $977,900 | 13.05%
1937 | $1,028,000 | 5.12%

1938 | $992,600 | -3.44%
1939 | $1,072,800 | 8.07%
1940 | $1,166,900 | 8.77%
* Millions of 2005 dollars
Next, real per capita GDP:
Real US Per Capita GDP 1870–2001
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate

1929 | 6899 | 5.02%
1930 | 6213 | -9.94%
1931 | 5691 | -8.40%
1932 | 4908 | -13.75%
1933 | 4777 | -2.66%
1934 | 5114 | 7.05%
1935 | 5467 | 6.90%
1936 | 6204 | 13.48%
1937 | 6430 | 3.64%

1938 | 6126 | -4.72%
1939 | 6561 | 7.10%
1940 | 7010 | 6.84%
(Maddison 2006: 88).
By 1936, real GDP had surpassed its 1929 level, and in 1937 real per capita GDP was close to reaching its 1929 level as well – until Roosevelt listened to advocates of fiscal austerity and the economy plunged back into recession.

And unemployment under Roosevelt fell consistently down to 1938. It is now well known that the official statistics do not include the employment provided by emergency and relief work in US federal government programs (Darby 1976). The reason for this was nothing but an ideological bias on the part of Lebergott, who compiled the figures.

When employment provided by relief work is included in the employment figures, unemployment under Roosevelt came down from 25% to just under 10% by 1937. This is a much better record on unemployment than the official statistics reveal.

One can see proper graphs of the falls in unemployment here:
Mitchell, B., “What causes mass unemployment?,” January 11th, 2010.

“(Very) short reading list: unemployment in the 1930s,” October 10, 2008.
The unemployment rate soared again when Roosevelt cut government spending in 1937, but the adjusted figures show it rising from under 10% to about 12.5% in 1938, and not to around 19% in the old figures

The Austrians just flunk history, time and again.


Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790–1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.


  1. "The Austrians just flunk history, time and again."

    The best way to make sure history is on your side is to write the history.

    A technique used by propagandists since time immemorial.

    All economics suffers from curve fitting and data mining to fit beliefs. Austrians are just an extreme example of that tendency.

    1. That's far too kind. Every good historian knows that history is a narrative and contains the voice of the author. But the key to being a good historian is that you try to allow your voice bend to the facts, not vice versa.

      The Austrian version of history looks like something that emerged out of Moscow University circa 1948.

  2. Can't wait to hear Murphy's explanation of the WWII boom. He's either going to have to completely contradict himself and admit that he spins history to suit his political agenda or he's going to have to claim that a wizard did it.

    Consistency -- it's not the Austrians' strong point. Now bring on the wizard!

    1. Phil, You aren't thinking like a (web/modern) Austrian - it's kind of an insult to the real, old, dead Austrians to call them the same name. I mean Menger-->Bohm-Bawerk->Schumpeter->Minsky->Wray, y'know.

      The correct "Austrian" answer is: What WWII boom? It didn't happen. The wartime boom was a myth - although everybody at the time thought different. Robert Higgs & Robert Murphy are leaders in writing this version of the Great Austrian Encyclopedia.

      Brings to mind that a PR problem is that not only those who have lived through the Great Depression & the War died out, those who lived through the postwar era have begun to disappear & become a shrinking portion of the intelligentsia. Murphy being born in 1976. I've talked to webAustrians who insist that the USA was a stagnant no-growth quasisoviet state before the liberator Reagan. But it's a problem that solves itself; to the extent that this history is forgotten^H^H^H^H rewritten, it will certainly repeat itself. Reality being the best PR.

    2. The funny thing about that post is even the American conservatives don't buy it - and they're the ones who are to be reflexively against anything that happened under liberal Democratic presidents!

      brushing off war rationing as an 'excuse' that Keynesians give does not sit well with any person capable of rational thought.

  3. Another weakness in that tired old “malinvestment” story is that if firms were seriously short of investments with which to meet demand, you’d expect to find capacity utilisation at an unusually high level. Well it just ain’t. Least not according to this StLouis Fed chart:


    Another plausible constraint on expanding output is suitable skills. But the evidence is that the excessive number of people in the construction industry prior to the crunch (and related activities like estate agents, etc) have had no more difficulty finding alternative work than those made redundant from other industries.

    Against that, there IS THE fact that inflation is still above 2%, which is a puzzle. My guess is that labour tends to demand wage increases of a MINIMUM of about 2% a year REGARDLESS of whether GDP or productivity are rising or not. As for management, they get pay increases of a teensy bit more than 2% as Bob Diamond will attest.