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Modern Economic Theory Not Necessarily Valid in Hindsight

December 06, 1987

I read with great interest the comments of Michael Boskin concerning the differences between the stock market crash of 1929 and the recent selloff in stock markets worldwide (Times Board of Economists, Nov. 8).

Boskin makes many telling points regarding the dissimilarities between recent events and those of a half-century ago. But his relative optimism is at times based on some debatable propositions concerning the reasons for the severity of the debacle of 1929.

Boskin's view that the Great Depression cannot be repeated is a rather common opinion among economists today, that the contemporary business cycle has been tamed by a new wisdom and learning regarding policy formulation and incidence.

But to say that the Great Depression was primarily the outgrowth of policy errors is an extremely problematic position unsupported by historical facts.

President Franklin D. Roosevelt's efforts to balance the federal budget and the Federal Reserve Board's decision to tighten the money supply in the early 1930s were actions fully in accord with previous practice that seemingly had worked during earlier recessions, such as the post-World War I slump.

Understanding the severity of the slump in the '30s requires an evaluation of how the structure of the nation's economy had changed in the inter-war period (so that) policy wisdom suddenly became obsolete.

Failing this, one is left with the rather unsatisfying (and unconvincing) claim that what went wrong in the '30s was that politicians and policy-makers suddenly became extremely ignorant and inept at their tasks.

Boskin's claims concerning the negative impact of the Smoot-Hawley Tariff are beyond dispute, generally speaking. But (because) the percentage of gross national product accounted for by export trade was insignificant throughout the inter-war period, such a claim tells us more about the problems facing certain foreign economies than about those facing the United States at the time.

Certainly we have come a long way in formulating appropriate counter-cyclical measures to combat downturns. But the success or failure of particular government actions cannot be judged solely by resort to theoretical (and contemporary) formulas.

Each historical case must be evaluated in light of all the available evidence. One wishes history were tidier than this. It is one of its enduring (and perhaps appealing) qualities that it is never so.

MICHAEL A. BERNSTEIN

La Jolla

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