Tuesday, July 30, 2013

Hoover’s High Wage Policy and the Great Depression

Austrians think Hoover’s “high wage” policy was a major cause of exacerbating the Great Depression, as can be seen in this video by Steve Horwitz (and in the ones that follow in the play list).

While I would not deny it had a negative effect, the trouble with this interpretation is the following:
(1) Hoover’s policy was largely limited to certain industrial markets, and was not generally forced on industrialists.

On November 21 1929, Hoover met with business leaders and labor representatives in the White House. The press release makes interesting reading:
“The conference this morning of 22 industrial and business leaders warmly endorsed the President’s statement of last Saturday as to steps to be taken in the progress of business and the maintenance of employment. The general situation was thoroughly canvassed, and it was the unanimous opinion of the conference that there was no reason why business should not be carried on as usual; that construction work should be expanded in every prudent direction both public and private so as to cover any slack of unemployment. It was found that a preliminary examination of a number of industries indicated that construction activities can in 1930 be expanded even over 1929. ….

It was considered that the absorption of capital in loans on the stock market had postponed much construction and that the flow of this capital back to industry and commerce would now assist renewed construction.

It was the opinion that an indirect but very substantial contribution could be made to the extension of credit for local building purposes and for conduct of smaller business if the banks would freely avail themselves of the rediscount privilege offered by the Federal Reserve Banks.

The meeting considered it was desirable that some definite organization should be established under a committee representing the different industries and sections of the business community, which would undertake to follow up the President’s program in the different industries.

It was considered that the development of cooperative spirit and responsibility in the American business world was such that the business of the country itself could and should assume the responsibility for the mobilization of the industrial and commercial agencies to those ends and to cooperate with the governmental agencies. ….

The President was authorized by the employers who were present at this morning’s conference to state on their individual behalf that they will not initiate any movement for wage reduction, and it was their strong recommendation that this attitude should be pursued by the country as a whole. They considered that aside from the human considerations involved, the consuming power of the country will thereby be maintained.

The President was also authorized by the representatives of labor to state that in their individual views and as their strong recommendation to the country as a whole, that no movement beyond those already in negotiation should be initiated for increase of wages, and that every cooperation should be given by labor to industry in the handling of its problems.”

So the “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with.

Vedder and Galloway (1997: 92) – who themselves think that the high wages were the major cause of the unemployment during the depression – nevertheless point out that Hoover received “wholehearted support” from businessmen at his White House meeting on November 21, 1929. Even Henry Ford agreed with it (Vedder and Galloway 1997: 92).

Furthermore, even though there was some degree of “jawboning” of certain business people who wished to cut wages,
“In a survey of business leaders in mid-1930 by Printer’s Ink magazine, corporate executives were near-unanimous in their support of the high-wage policy coming out of the November 1929 conference at the White House. Howard Heinz, the ketchup maker, said: ‘In this enlightened age, large manufacturers . . . will maintain wages ... as being the far-sighted and . . . the constructive thing to do.’ Carleton Palmer, president of E. R. Squibb & Son, advocated increasing hourly wages by reducing the workweek and maintaining weekly wages constant. William Wrigley, the gum magnate, said he would not reduce wages, while Charles C. Small, president of the American Ice Co., said he believed in ‘good wages to aid purchasing power.’ George F. Johnson, president of Endicott Johnson Corp., echoed that sentiment, declaring that ‘reducing income of labor is not a remedy for business depression; it is a direct and contributing cause.’

Big business felt it had a duty to carry through the high-wage-policy.” (Vedder and Galloway 1997: 94)
Now let us assume for the sake of argument that the “high wage” policy really was the single worst policy endorsed by Hoover. But why aren’t Austrians blaming the private industrialists and business people who supported and endorsed this “high wage” policy, since it was clearly their fault as much as Hoover’s? It is doubtful that the “high wage” policy could have been carried out without so much support from the private sector.

Yet in his video “Hoover’s Labor Market Policies” (in the playlist above), Horwitz says that Hoover “persuaded” industrial leaders with the “power of the presidency” not to cut wages, as if this was against their will or against their better judgement. That is untrue: in fact, very many corporate leaders already held the same opinion as Hoover.

(2) Gardiner Means, in his own contemporary work on prices in the 1930s, noted how it was in fact industrial prices that were relatively less flexible than other prices in the US economy during the early years of the Great Depression (Lee 1998: 28).

So, given that relative inflexibility in industrial prices, to what extent did the high wages per se with (less severe) price cuts in those industries really exacerbate the depression? Although it stands to reason that, when industrial prices did start to fall significantly, this would have squeezed profits in the relevant industries, the fact is that output and employment was already directly reduced in many firms anyway as a response to the demand shocks, which were the primary cause of the increased unemployment.

(3) Far from being the solution to the depression, severe wage cuts even in 1929 would have severely worsened the debt deflationary spiral and increased the real burden of debt for debtors, putting pressure on them and eventually driving many into bankruptcy, and in turn driving creditors into bankruptcy. Of course, that is exactly would did happen in the depression as nominal wages fell after 1931 and continued to fall in 1932 and 1933.

(4) I need hardly add that the marginal revenue product theory of wages is wrong, since wages are socially and institutionally determined. It is also nothing short of an article of faith that wages tend to towards some market-clearing level in modern capitalist societies.

The inducement to investment and employ workers is so much more complex than the dynamics of the price of labour analysed as movements along a demand curve under the ceteris paribus assumption. Aggregate demand for output is a fundamental driver of production and employment (Lavoie 1992: 219–220), and the demand shocks resulting from pessimistic expectations (increased savings), falling consumption, loss of savings from bank collapses, and debt deflationary dynamics seem a far more plausible explanation of most of the unemployment during the depression. The US, for example, had a strong (though, admittedly, far from complete) economic recovery after 1933 even though real wages were rising (Bernanke 2000: 31). Clearly, rising average real wages do not necessarily have to result in increased unemployment (see Keynes [1939] for his recantation of neoclassical marginal revenue product theory).
Daniel Kuehn draws attention to these important articles relevant to this issue, one of them by him:
Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843-870.

Kuehn, Daniel. 2012. “A Critique of MacKenzie, Not an Endorsement of Hoover: Reply to Vedder and Gallaway,” The Quarterly Journal of Austrian Economics 15.1: 442-453.

Bernanke, Ben S. 2000. Essays on the Great Depression. Princeton University Press, Princeton, N.J.

Keynes, J. M. 1939. “Relative Movements of Real Wages and Output,” Economic Journal 49: 34–51.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Vedder, Richard K. and Lowell E. Galloway. 1997. Out of Work: Unemployment and Government in Twentieth-Century America. New York University Press, New York.


  1. Septeus7@gmail.comJuly 30, 2013 at 9:20 AM

    If high wages were the problem then the Brüning Austerity were wages fell by 50% should have done wonders for the German economy. It was far worse than the American experience.

    Lord Keynes, you are going in the wrong direction by blaming the traditional American school doctrine on the industrialist of the time as being the problem. High wages are not a problem.

    Anyone who argues against high wage rigidity doesn't the first thing about economics.

    The higher the rigidity the better the economy.

    Look at the empirical equality studies which show that higher levels of income inequality come with lower rigidity and high inequality is associated with generally poor economic performance.

    I believe that Angry Bear blogger SandwichMan has documented the empirical higher rigidity correlation with higher wealth and equality. Jamie Galbraith and Ha Joon Chang has also noted the how rigidity argument is completely the opposite of the empirical data.

    Why do economist insist that wage rigidity is a problem?

    What is wage rigidity i.e. the maintaining the value of labor a bad thing?

    Why do they insist that the labor must be devalued first even when productivity is still increasing in absolute terms?

    If most people only have the option to exchange their labor value in order to gain access to economic means i.e. money then wouldn't it be logical that increasing productivity would increase wages so as to allow consumer access to increased output?

    How does decreasing wages and therefore people's ability to consume what they produce cure a depression?

    It is sector size that must adjust not the wage level. Economists including Keynes are idiots on this point.

    How else is efficiency determined if we assume that only the cost of labor i.e.. the universal input is only thing that must be flexible?

    Shouldn't market efficiency be measured according what isn't universal but rather what is specialized so as to discriminate among capitalist producers of different sectors as to who is making better use of the universal input? If markets aren't doing this then what exactly are they doing?

    I thought the purpose of markets was to allocate resource efficiency so that they would could be matched the sectors that make the best of the resource. If a sector can't maintain it's size without constantly devaluing even a universal resource like labor then how it that efficient?

    Shouldn't the inefficient sector shrink and allow more efficient employers of labor in other sectors who can maintain the value of the labor i.e. the wage level be allowed to compete?

    Why does the Austrian school insist on subsidizing obsolete capital by devaluing everyone's labor?

    Why does the Austrian school say that working class must be the "flexibility" enduring class when they can least afford such flexibility given their limited means?

    Logically, shouldn't the capitalist who have greater means and therefore should be the ones required to endure greater flexibility?

    Capital is inherently flexibility and constantly subject to devaluations i.e. (new tools displacing old ones)

    Why then does the Austrian school insists that is labor which is by it's nature more inflexible (worker's can't retrain in a heart beat, be shipped around like capital, etc...) than capital?

    Why must the nature relationship be inverted according to achieve efficiency?

    One would think that the cost of trying to invert natural relationships isn't efficient at all.

    There is no logic at all to the Austrian school. It is merely class bigotry posing as economics.

    1. It is sector size that must adjust not the wage level. Economists including Keynes are idiots on this point. Great comment, but why criticize our poor, gracious host? ;-) He was the greatest apostle of sector size adjustment. Sure, he got a few things wrong, most of which he later corrected - before he started blogging even!

    2. Yeah, I kinda jumped the gun on this...in a way you can argue most of my points are just a version of Keynes' stickyness of wages but I never really seen an clear statement by Keynes on why this argument all problems are because labor is always overpriced due to rigidity is total hogwash.

      I'm often confused as to Keynes positions on many things actually are because he seems to shift over time and interpretations can be many kinda like Marx.

      I'm probably ignorant about some really clear statement by Keynes somewhere on this issue so I would actually very much like to be wrong on this issue. It's hard to know everything about Keynes thinking.

  2. I pointed out Daniel Kuehn's engagement with Douglas MacKenzie, Richard Vedder, and Lowell Gallaway in the Quarterly Journal of Austrian Economics in an older post of yours not too long ago. I was wondering when you would read those pieces.

  3. Hello Lord Keynes

    I apologize for making a post not remotely connected to this blog post, but I was unable to find your other blog: Thoughts, Philosophy, and Culture.

    There's a new book by Reza Aslan, a scholar with fluency in biblical Greek, who discusses many of the same points on the historical Jesus that you have raised in that blog, and I was wondering your opinion on it, if you have read it.

    Prateek Sanjay

    1. I'm afraid of not heard of him or his book, but from reading the reviews on Amazon, it looks like it's not really that original: the idea that Jesus was political and maybe associated with the emerging nationalist/zealot movement was made by Hyman Maccoby's Revolution in Judea: Jesus and the Jewish Resistance (1973).

      Also, anyone who has written anything reasonable about Christianity knows that there is a gulf between the Christianity of Paul of Tarsus/St Paul and the original Jewish followers of Jesus (and by implication Jesus himself). That Paul pretty much founded modern Christianity as a Hellenised version of it is undoubtedly right.

      The extreme version of this "Hellenised" Christianity thesis can be found in Hyman Maccoby's The Mythmaker: Paul and the Invention of Christianity (1986) and Paul and Hellenism (1991), though I think Maccoby goes a bit too far.

    2. Also, here's the link to my other blog: