What – or who – started the great depression?

Abstract

Herbert Hoover. I develop a theory of labor market failure for the Depression based on Hoover's nominal wage policies that provided industry with protection from union strikes in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression, the asymmetry of the depression across sectors, and the substantial decline in investment. The theory also provides an explanation for why low nominal spending had such large real effects during the Depression, but not during other periods of significant deflation..

Understanding Economic Crises: The Great Depression and the 2008 Recession

“…The key to understanding both the depression of the 1930s and the recession of 2008 is developing theories of labour market distortions that can account for why the marginal product of labour significantly exceeded the marginal rate of substitution between consumption and leisure. I have developed theory and presented evidence that the labour policies of Herbert Hoover are a candidate factor for the Great Depression (Ohanian, 2009), but theories along these lines for the recession of 2008 remain an open question.…”

“…My explanation for this industrial labour market failure is a large change in industrial labour policy initiated by President Hoover in late 1929 (Ohanian, 2009). Specifically, in November 1929, Hoover met with a number of industrial leaders, including Henry Ford, of Ford Motor Company, Alfred Sloan, of General Motors, and Elbert Gary of US Steel.…”

How Capitalism Endogenously Creates Rising Income Inequality and Economic Crisis: The Macro Political Economy Model of Early Industrial Relations

“…The government's no-win position. Orthodox economists (e.g., Friedman and Schwartz 1963;Prescott 1999;Parker 2007;Ohanian 2009) claim the onset and worsening of the depression was largely the fault of government intervention and misguided policies. From the IEIR perspective (Galbaraith 1961), the contradictions of American capitalism in the 1920s put the government in a no-win situation and the real blame rests on inherent structural imbalances, income-wealth inequalities, and wage-price anomalies which short-circuited the system's (presumed) self-correcting mechanism and drove it to an unsupportable AD < AS position.…”

Involvement of a Capitalist Crisis in the 1900-30 Inequality Trend Reversal

“…He got large firms such as General Motors, Ford, U.S. Steel, Dupont, and International Harvester to comply with his requests (Ohanian 2009). These efforts had considerable success; unskilled wage levels fell only 6% over 1929-31 compared to 24% over 1920-22 (Officer and Williamson 2015b.…”