Austrian School of Economics and the Great Depression

            Scholars and economists of the Austrian school of economics teach that American students of U.S. history are taught in the nation’s secondary school system to believe that Franklin D. Roosevelt’s famous New Deal and the Second World War brought the country out of the Great Depression; however, when actual economic statistics from the time period are reviewed, an alarming inconsistency to that story is revealed. Quickly, the old fables are exposed as myths and the true culprit of the Great Depression is discovered, government intervention.

            They further explain that opponents of free trade, interventionists, have attempted to blame the Great Depression as being a result of laissez faire economics; these interventionists have created the myth that government involvement saved the nation from economic hardship. According to their story, free markets are volatile and dangerous, while the New Deal represents the indispensable corrective power of the state.”[1] However, economists of the Austrian school teach that the Great Depression was not a result or failure of capitalism, “but of the hyperactive state.”[2] There are some black and white facts favor and support the Austrian economists.

            In the August 2004 Journal of Political Economy¸ “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,” interesting statistics supporting the argument against the New Deal assisting the nation to pull out of the Great Depression has been presented by UCLA economists Harold L. Cole and Lee E. Ohanian.[3] According to economist Thomas J. DiLorenzo, “This is a big deal, since JPE is arguably the top academic economics journal in the world.”[4] The two authors admittedly revealed their own surprise with such statistics as: “Real gross domestic product per adult, which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939....Similarly, private hours worked were 27 percent below trend in 1933 and remained 21 percent below trend in 1939.”[5]

            Interventionists claim that the New Deal was bringing the United States out of the Great Depression, but the statistics do not match these claims. Especially, when compared to other nations that did not intervene in their nation’s economies on the same scale of the United States, like Great Britain. According to Steve Davies, Education Director at the Institute of Economic Affairs in London, he stated: “In Great Britain, the Great Depression was over by 1933, and Britain, in fact, enjoyed very rapid economic growth from 1931 onwards.”[6]  He goes on to say that the economic situation in the United States actually was getting worse as the years passed; “and by 1937, the level of unemployment in the United States is as high as it had been in 1932, but in addition the federal government has built up an enormous debt.”[7] Even by 1939, according to the U.S. Census Bureau, the unemployment rate in the United States was still very high at 17.2 percent, “despite seven years of ‘economic salvation’ at the hands of the Roosevelt administration.”[8] Prior to the Great Depression and government intervention, the unemployment rate was much lower at “about 3 percent.”[9] Economist DiLorenzo continues pre-and-post New Deal comparisons in his article: “Per capita GDP was lower in 1939 than in 1929 ($847 vs. $857), as were personal consumption expenditures ($67.6 billion vs. $78.9 billion), according to Census Bureau data. Net private investment was minus $3.1 billion from 1930–40.”[10]

               Austrian economists have viewed and claimed that Roosevelt’s New Deal policies only made the economic situation of the 1930s worse and “prolonged the Depression.”[11] This might have been alarming to economists Harold L. Cole and Lee E. Ohanian, but according to Austrian economists, they “have known this for decades.”[12] They have seen government intervention as a ploy to create “one giant cartel;” which John T. Flynn described in his 1948 book, The Roosevelt Myth: “New Deal cartelization policies are a key factor behind the weak recovery, accounting for about 60 percent of the difference between actual output and trend output.” It is clear that the opposing side of story told by the Austrian school of economy has not been taught in America’s secondary schools, which has contributed to the continuing myths behind the Great Depression and the New Deal.

Bibliography

Davies, Steve. “Top Three Myths About the Great Depression and the New Deal.” Learn Liberty, July 1, 2011. http://www.learnliberty.org/videos/top-three-myths-about-the-great-depression-and-the-new-deal/.

DiLorenzo, Thomas J.  “The New Deal Debunked (again).” Mises Institute, September 27, 2004. http://mises.org/library/new-deal-debunked-again.

Johnson, Paul. “Rothbard Revises the History of the Great Depression.” Mises Institute, October 14, 2011. http://mises.org/library/rothbard-revises-history-great-depression.

Woods, Jr., Thomas E. “Know the New Deal Cold.” Mises Institute, July 30, 2010. http://mises.org/library/know-new-deal-cold.

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[1] Thomas E. Woods, Jr., “Know the New Deal Cold,” Mises Institute, July 30, 2010, http://mises.org/library/know-new-deal-cold.

[2] Paul Johnson, “Rothbard Revises the History of the Great Depression,” Mises Institute, October 14, 2011, http://mises.org/library/rothbard-revises-history-great-depression.

[3] Thomas J. DiLorenzo, “The New Deal Debunked (again),” Mises Institute, September 27, 2004, http://mises.org/library/new-deal-debunked-again.

[4] Ibid.

[5] Ibid.

[6] Steve Davies, “Top Three Myths About the Great Depression and the New Deal,” Learn Liberty, July 1, 2011, http://www.learnliberty.org/videos/top-three-myths-about-the-great-depression-and-the-new-deal/.

[7] Ibid.

[8] DiLorenzo, “The New Deal Debunked (again).”

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.