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Monday, April 27, 2009

Lies my school teacher taught me

Not that I believed them at the time:

The results speak for themselves. During the heartless "liquidationist" era before Hoover, depressions (or "panics") were typically over within two years. Yes, it was surely no fun for workers to see their paychecks shrink quite rapidly, but it ensured a quick recovery, and, in any event, the blow was cushioned because prices in general would fall too.

So what was the fate of the worker during the allegedly compassionate Hoover era, when "enlightened" business leaders maintained wage rates amidst falling prices and profits? Well, Econ 101 tells us that higher prices lead to a smaller amount purchased. Because workers' "real wages" (i.e., nominal pay adjusted for price deflation) rose more quickly in the early 1930s than they had even during the Roaring Twenties, businesses couldn't afford to hire as many workers. That's why unemployment rates shot up to an inconceivable 28 percent by March 1933.

One of the killer arguments my old economics professors used to bring out, supposedly devastating proof that markets don't really work all that well, is the Great Depression. Prices remained "sticky" during the crisis, wages even more so. Long and often convoluted explanations were provided for this problem of "stickiness." Workers were resistant to wage cuts. The inherent irrationality of markets in a crisis. Not once was it mentioned in any classroom by any professors the policies of the Hoover administration. I discovered the actual policies of the Great Engineer while reading obscure and yellowed texts written by Austrians and libertarians in the 1930s and 1940s.

Posted by Richard Anderson on April 27, 2009 in Economic freedom | Permalink


To me, this is the most important economic myth that absolutely needs to be dispelled and yet no one seems to ever touch upon it.

Posted by: Charles | 2009-04-27 8:07:11 AM

Excellent post, Publius.

Posted by: Matthew Johnston | 2009-04-27 10:41:56 PM

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