Tuesday, May 25, 2010

debunking the conservative view of economic history deep into the early nineteenth century

In this post Krugman rejects the conservative claim that Reagan introduced an era of rapid growth to a previously sick economy through deregulation and general laissez-faire policy. This argument is essentially correct: there was nothing about the lack of a regulatory framework which spurred growth. The turn away from Keynesianism had more to do with the supply shocks of the 1970s and was not due to a general failure of Keynesian economic policies themselves (which worked quite "well" up until that time). Krugman highlights this best here:
The era of strong unions, high minimum wages, high top marginal tax rates, etc.
was also a period of rapid growth and rising living standards. That doesn’t
prove causation; it does disprove the widespread dogma that these things are
always economically devastating. And it’s telling that so many on the right have
airbrushed the whole postwar generation out of history.

This post reminded me of an article I recently read and suggested as optional reading for my Econ 362, American Economic History class which has a similar thesis but that it pertains to the long run: the history of the U.S. economy is built on laissez-faire government, so any modern attempt to regulate, say, the financial system, is to turn back on historical principles of American democratic capitalism. The article is here. A good excerpt:
American capitalism also developed at a time when government involvement in the
economy was quite weak. At the beginning of the 20th century, when modern
American capitalism was taking shape, U.S. government spending was only 6.8% of
gross domestic product. After World War II, when modern capitalism really took
shape in Western European countries, government spending in those countries was,
on average, 30% of GDP. Until World War I, the United States had a tiny federal
government compared to national governments in other countries. This was due in
part to the fact that the U.S. faced no significant military threat to its
existence, which allowed the government to spend a relatively small proportion
of its budget on the military. The federalist nature of the American regime also
did its part to limit the size of the national government.
But as I hinted at in an earlier post, one can extend Krugman's argument against the conservative commentary of Reagan back to the early nineteenth century at least: government has, through various channels throughout history, substantially altered the growth trajectory of the economy across crucial dimensions such as labor market "policy" and property development.

So in summary, Krugman praises regulation and general state policy in the economy as eliciting the strongest combination of successful capitalism and redistribution to counter the evil effects of inequality. Conservatives, on the other hand, either want to say such redistribution coupled with capitalism's success never happened or is a "deviation from optimal performance" (as in the case of the long run view of history), or simply ignore the success altogether (as with the "Golden Age" story). Something is seriously wrong with conservatives when they can't even develop a consistent critique.

If I were conservative and I wanted to critique the policies of the U.S. over the course of the last 200 years, I might as well become an anti-modern country bumpkin. Don't get me wrong, there's nothing wrong with that at all! -- in fact, I would say it's the most faithful type of conservatism there is. But that's for a later post!

Keeping with a common theme on this blog lately, how best to drive this point of institutionally contingent markets on the popular front?

Still waiting to hear suggestions!


  1. A simple example I can think of (learned in 362 from the guest lecture) was how Holyoke's rapid industrial development in the second half of the nineteenth century was spurred directly by a massive local government investment (by selling huge municipal bonds for the time if I recall correctly) in local infrastructure by building waterways and such. Only a small example, but clearly government intervention in developing that property through constructing waterways allowed the textile and paper mills to later succeed.

  2. I think a good complement to your discussion, in which, for example, the state might engage in policies that might not foster growth but are put into place to make sure capital maintains power over labor, is Bowles & Gintis 1982 paper on the welfare state from a keynesian, neoclassical and marxian perspective. It focuses on the relationship with carrot and stick strategies that affect productivity (extraction of labor from labor power)and its reflection in growth. You can access it here: http://tuvalu.santafe.edu/~bowles/WelfareState1982.pdf

    These were the good old days:-)

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  4. Great comments...

    Peter - Debt financing was definitely a popular way to fund these development projects. But don't forget Horwitz' /Transformation of American Law/ which makes the same argument for the pre-civil war economy.

    Ian - this is an excellent short article and a great introduction to radical views of the welfare state. This could be a perfect piece for an upper-level undergrad course. I especially liked the part where they conceive of welfare state policy as the reproduction of an entire institutional edifice.

    And the connection between business cycles and productivity growth is interesting. It reminds me a bit of Wolff's story about productivity.