Smart People Who Believe Dumb Things
What is remarkable in Ahamed's book are both the parallels and contrasts of the 1920s to the past decade. The most obvious parallel is the amazing ability of smart people to collectively believe such dumb things-- and inflict pain on others justified by those wrong beliefs.
In the 1920s it was the Gold Standard-- the firm faith that price consistency between nations must be maintained at all costs. What is striking is how much the costs of deflation and joblessness imposed by it was understood; as is described on p. 161, Britain in 1920 very consciously went back on the gold standard and "two million men were thrown out of work" and, note a decade before the Great Depression, mass unemployment would persist for the next two decades. Some like Keynes identified the madness but most "smart" people thought such the gold standards and its costs the height of sanity.
Just as "securitization" and deregulation were the obvious financial orthodoxy in recent years, with groups condemning "predatory lending" and demanding more financial regulation treated as cranks.
One other parallel, as the British example emphasizes, is that financial success can often inflict economic suffering and losses in the non-financial economy. As Ahamed describes, Britian was financially orthodox and seemingly stable in the 1920s, while France in the early 1920s careened from government to government, policy to policy including deliberately encouraging inflation, yet the French people seemed to do quite a bit better: "The number of unemployed in France was a fraction of that in Britain" (p. 219).
In the last decade, we saw financial and related markets like the housing industry doing well in the United States, even as the core of manufacturing was collapsing in many places. The fall of the Big Three automakers was not unique; in the Great Lakes region alone, 1.5 million manufacturing jobs were lost since 1998. Yet this was largely seen as a non-problem as long as the financial sector was healthy.
Much as Britain gutted its manufacturing capacity in favor of financial orthodoxy, the United States largely did the same in the name of modern financial orthodoxy.
A core point here is that what smart people among the financial elite believe should be treated with great skepticism, especially when great harm to non-elite actors are justified by those economic arguments. Fumbling, populist France in the 1920s comes off better than other countries following orthodoxy, backing "into the position of the strongest economy in Europe"(p. 376).
What is interesting is that the French central banker, Moreau, most clearly articulated monetary policy as being about "sacrifices demanded of the different social classes in the population."(p 264) i.e. there is no neutral financial policy but deliberate choices to harm some groups in favor of others and that policy that acts as if there is a singular orthodox path to prosperity for all is likely just elite ideology protecting the interests of the elite masking as economic neutrality. Moreau was hardly a left radical but understood that any policy that left large chunks of the population bleeding, especially those at the bottom of the pyramid, was unlikely to end well.
So the question is whether present federal policies are enough, whether we have collectively learned our lessons from the Great Depression, if not in replicating too much trust in the financial elite, at least in quickly moving to throwing money at the problem to fix the damage. The answer will be seen in the coming year or two, but the encouraging part is that helping those harmed by the past decade did grab some focus of the recent recovery plan, with billions for unemployment insurance, food stamps and job training. But relative to the overall economy, those dollars are still rather low, especially compared to the money streamed to the elite in recent decades, so it's reasonable to say that the lessons from that past era have only been partially learned.
But it's early yet and the Obama administration may keep stumbling towards the right policy. And I say stumbling with all deference, since one of the best lessons we can probably learn is that experimentation and an eye towards testing policies, especially when aimed at helping those most in need, is far better than confident financial orthodoxy.
And I say stumbling with all deference . . . .
I believe it's called "muddling through."
April 14, 2009 4:17 PM | Reply | Permalink
I wonder if "globalization" itself will later be seen as a dumb thing collectively believed in by smart people. In the sense that a lot of the virtues of globalization depend on undervalued energy costs, undervalued costs of environmental degradation, and a weak labor movement.
April 14, 2009 4:21 PM | Reply | Permalink
In the early '30's when an average of 120 banks/month failed for 48 months in succession, not ALL banks failed. And the ones which didn't have been ruling the roost ever since.
Smart people may believe dumb things, and there are always smart people around to reap the results of their stupidity. It's as true now as it was 80 years ago.
April 14, 2009 4:41 PM | Reply | Permalink
"It is difficult to get a man to understand something when his job depends on not understanding it."
-Upton Sinclair
//
Seems like we're destined to relive the past, no?
April 14, 2009 6:26 PM | Reply | Permalink
Britain in 1920 very consciously went back on the gold standard and "two million men were thrown out of work" and, note a decade before the Great Depression, mass unemployment would persist for the next two decades.
If Britain had stood up to the unions and allowed wages to fall as prices fell, maybe this would not have happened.
Much of the problem of the Depression and of the inflation leading to the Depression came from Britain's conviction that wages must never fall (a conviction shared by Herbert Hoover). It is strange that a person such as Mr. Newman (who I believe is of the school of thought that high wages bring prosperity by increasing demand) can simultaneously criticize others for believing dumb things while they also advocate for the same high-wage policies that helped to keep the Depression going, using the same arguments that were used during the Depression.
What people do not seem to realize is that for those who had the same job throughout the early years of the Great Depression, real wages went up as deflation decimated prices. The problem was that companies could not afford to pay high wages and they were threatened by Hoover into paying them anyway, resulting in all but the most productive workers losing their jobs.
April 14, 2009 6:50 PM | Reply | Permalink
Ah the ideology that deems that the only choice is lower wages or unemployment -- and can't conceive of another option. Such as not pegging the British pound to the gold standard in the first place at too high a rate, which Ahamed's book highlights as the key problem, not according to him but to almost every other country's central bank by the end of the decade.
But Glaivester pushes the faith that it was not mass underconsumption but that the working class had it too good in the Depression that was the problem. Yes, they were just living it up too well on those breadlines!
You almost admire the sheer tenacity and commitment to ideological propaganda represented by those now arguing that it was the unions, FDR and social spending that caused the Depression. Oh yeah, and Hoover was the left's mole now, doing our dirty work. Kind of silly, but just kind of intellectual teabagging-- Glen Beck rhetoric for the conservative book set.
April 14, 2009 8:30 PM | Reply | Permalink
Hoover was the left's mole . . . .
Don't insult the man.
He was no mole; he was straight up about his intentions -- fix prices, keep wages up, build infrastructure; indeed, as respects the New Deal, he was super-Elijah.
April 14, 2009 8:49 PM | Reply | Permalink
good points, E., but I think Nathan was joking about Hoover being the left's mole, in reference to the ridiculous assertion by that commenter about Hoover doing the left's bidding.
I'd forgotten that Hoover, if not too late and with too little, had at least had gotten the ball rolling and do admire him for applying the wisdom of common sense. His reputation does deserve rescuing somewhat from the confusion of the times.
April 14, 2009 11:56 PM | Reply | Permalink
As Brain Trust member Rex Tugwell admitted, "practically the whole New Deal was extrapolated from programs that Hoover started."
April 14, 2009 8:58 PM | Reply | Permalink
Such as not pegging the British pound to the gold standard in the first place at too high a rate, which Ahamed's book highlights as the key problem, not according to him but to almost every other country's central bank by the end of the decade.
It could have pegged the pound to gold at a lower rate - but that would mean that real wages would be lower anyway, because the pound would be worth less.
The point is, the gold standard itself was not the problem. The problem was that Britain wanted the gold standard at the previous rate without having to adjust wages and prices to the economic reality.
And I am not saying that high wages are a bad thing, just that in times of deflation, wages will drop, all else being equal, and wages should be allowed to find their appropriate market price.
Hoover did not
April 14, 2009 9:18 PM | Reply | Permalink
Sorry, hit "submit" too early.
Hoover did not allow prices to find their natural floor at the beginning of the Depression, and this helped to keep unemployment up.
Hoover also encouraged overproduction of agricultural goods, leading to gluts, and he also tried to inflate his way out of the Depression for 2 years with the Fed lowering interest rates from 6% to 1.5% by the third quarter of 1931. Of course, all we ever hear about is how terrible the Fed as for raising them in the 4th quarter of 1931 to 3.5%, with no acknowledgment that "easy money" had not helped in the slightest.
In any case, the real issue for Britain was its stupid participation in World War I and the enormous debts it racked up. The gold standard would have worked fine if Britain hadn't gotten involved in the European stupidfest.
The reason that governments hate the gold standard is that it restricts what they can do. Governments want the power to print money because it gives them the power to take control of the entire economy and to tax people out of house and home through inflation without it being obvious.
April 14, 2009 9:22 PM | Reply | Permalink
"The gold standard would have worked fine"-- it's just amazing that anyone holds out for such an insane idea. It's just bizarre that anyone really buys into a policy where money expands or contracts based on random gold finds in California, then Alaska and then South Africa-- creating a century of roller-coaster price contractions and expansions with little relationship to the real workings of the economy.
And you act as if inflation is an elite conspiracy foisted on the public, rather than a demand of that public to escape crushing deflation and debt. "I will not be crucified on a cross of gold" was a protest of government deflating the economy and destroying the livelihoods of farmers and others throughout the economy. Gold-based deflation is not a neutral policy but a transfer of wealth from much of the public to the rentier class.
April 14, 2009 11:50 PM | Reply | Permalink
And you act as if inflation is an elite conspiracy foisted on the public, rather than a demand of that public to escape crushing deflation and debt.
i.e. a demand of debtors to screw over their creditors.
It's just bizarre that anyone really buys into a policy where money expands or contracts based on random gold finds in California, then Alaska and then South Africa-- creating a century of roller-coaster price contractions and expansions with little relationship to the real workings of the economy.
As opposed to the money supply expanding or contracting based on one bank's decisions?
In any case, not all gold is used as money, and the amount of expansion due to production in any given year will be small enough that the economy can adjust to it. If the gold price rises, people will melkt down their jewelry, etc., and if it falls they will begin using more gold for things other than money.
April 15, 2009 6:24 PM | Reply | Permalink
Ah the ideology that deems that the only choice is lower wages or unemployment -- and can't conceive of another option.
Only during times of massive deflation and recession, not as a general rule.
Such as not pegging the British pound to the gold standard in the first place at too high a rate,
That certainly was a problem; that Britain wanted to go back to the gold standard at the old ratio without deflating its money supply. But the problem occurred because Britain had previously inflated its currency to fight World War I. You are correct in that if it wanted to go back to the gold standard without shrinking the money supply, it had to peg the pound to gold at a lower rate. The U.K.'s desire to eat it cake and have it too was indeed the problem. But my point is that pegging the pound to gold at a lower rate was not the only solution.
which Ahamed's book highlights as the key problem, not according to him but to almost every other country's central bank by the end of the decade.
With all due respect, trusting the central banks to interpret the economy is like trusting Exxon Mobil to research global warming.
But Glaivester pushes the faith that it was not mass underconsumption but that the working class had it too good in the Depression that was the problem.
Nathan, high wages only help those people who actually have a job. No one is denying that the working class had it shitty during the Depression. The point is that the effort to keep wages from falling wound up preventing a lot of people from having any wages at all.
And overall underconsumption is never the problem. The problem is always a lack of production, or misproduction (too much of one thing produced, not enough of another). The diea that we simply produced way too much or that we simply didn't spend enough is ridiculous.
Yes, they were just living it up too well on those breadlines!
The people on those breadlines were the victims of the high wage rates - those who could not get jobs because businesses could not afford to hire them.
In any case, I am not arguing against high wages - I am arguing that higher wages are naturally the result of greater productivity; they do not precede greater productivity. Now, you may argue that when productivity increases, action needs to be taken to make certain that the working class gets higher wages in order to benefit from it, and that argument may have some merit. But in times of falling productivity, increasing wages will not increase productivity.
The point I am trying to make is that bewail the fealty to the gold standard as a stupid idea that kept us in the Depression. But you support, as I recall, the idea that high wages are not just a good thing to have because workers deserve them, but a boon to the economy in times of trouble.
That is like arguing for polygyny on the grounds that it will make it easier for men to find wives. Sure, for those who find wives they will have more of them, but you wind up with a lot of men who cannot find a wife at all because the "big men" have married all of them.
April 15, 2009 6:43 PM | Reply | Permalink
But Glaivester pushes the faith that it was not mass underconsumption but that the working class had it too good in the Depression that was the problem. Yes, they were just living it up too well on those breadlines!
I'm sorry, I've got to repsond to this again.
I never, ever said that the "working class had it too good" in the Depression. What I said was that Hoover pushed businesses to keep wage rates too high. This meant that businesses could not afford to hire as many people, and that a lot of people were unemployed. Those who still had their old jobs had it good, but obviously those who lost their jobs and could not find new ones in industry because no one could afford to hire them did not.
How saying that wages were too high implies that the unemployed people in the breadlines (who by definition did not have any wages) had it good I cannot fathom.
I again repeat, increasing wages without increasing productivity does not suddenly make the economy get better or cause producitvity to magically increase; it just results in those who are least productive losing their jobs. In good times when almost everyone is productive enough to merit their wages ro more than their wages, such an increase may be justified, with only a minor effect on unemployment. But when we are experiencing massive deflation the economy is contracting, and low prices mean that lots of workers are barely productive enough to cover their wages, higher wages is a stupid, counterproductive policy.
April 15, 2009 6:55 PM | Reply | Permalink
"Moreau, most clearly articulated monetary policy as being about "sacrifices demanded of the different social classes in the population."(p 264) i.e. there is no neutral financial policy but deliberate choices to harm some groups in favor of others and that policy that acts as if there is a singular orthodox path to prosperity for all is likely just elite ideology protecting the interests of the elite masking as economic neutrality."
Sounds like Moreau got it right. How did we see this problem start? A bunch of people who couldn't pay back their mortgages. And why? Because the banks thought that they could make money by selling bad mortgages. The only problem: it wasn't just people who got into bad mortgages that suffered -- Everyone is suffering now that the house of cards fell.
Maybe one of the best things to do would be to address the root of the problem — predatory lending has put consumers into contracts with terms that are impossible to meet, and the result is exactly the credit crunch that we're faced with now.
So what about a regulatory body that ensures that these predatory lending practices don't occur?
http://hbr.harvardbusiness.org/web/2009/hbr-list/consumer-safety-for-consumer-credit
April 14, 2009 7:10 PM | Reply | Permalink
Pardon me for not being informed on economic history. I can't question anything that folks are writing on that, but I'm puzzled by a few things.
1) How does inflation tax someone out of house and home? Most people's most expensive liability is their home, so doesn't inflation work disproportionately to reduce the cost to assume ownership of the place? Isn't the same true for any large purchase? The standard course for these things is to labor first and then purchase or borrow to purchase.
2) I find it baffling that one of the statistics that gets repeated without comment is that > 1/2 of the economy is made up of "consumer spending." How can that be?! Shouldn't at least 1/2 of the economy be made up of some kind of production? Of something?!!! Can someone please translate this into something that makes some sort of sense to me? Please?
April 15, 2009 12:17 AM | Reply | Permalink
1) As you correctly note, it all depends on whether you're a borrower or a saver and whether you're wages or pension keep up with inflation.
2) All depends on whether you're talking about demand or supply. They're sort of equal, like on the opposite sides of the equals sign. Consumers account for 2/3 of demand (recently, it's been as high as 70%).
And no, we don't have to produce anything as long as furriners will take our financial certificates (nowadays it's just keypad entries -- such a comedown, aesthetically, that is) in exchange for their goods. Of course they have this annoying expectation that they'll be receiving interest on that paper. But in the end they usually accept more paper. No one knows why.
April 15, 2009 1:44 AM | Reply | Permalink
Ellen, slightly off topic but speaking of inflation, can you explain to me the following, "...'core' inflation rate 'strips' out volatile fuel and food prices." So does that mean that fuel and food prices are left out of the CPIndex? Sounds like 'volatile' is an excuse.
April 15, 2009 4:08 PM | Reply | Permalink
Wikipedia to the rescue.
Check descriptions of CPI-U and Core CPI.
Since the Fed's primary responsibility is maintaining a stable dollar (full employment? HA!) and the Fed uses price indices to decide whether inflation is a worry, you'll want to check the core inflation entry, as well.
April 15, 2009 8:13 PM | Reply | Permalink
Smart people who do dumb things is a pretty apt description of the financialiers of any era.
For example, in the 1870s the eastern financiers got ahold of an obscure pamphlet claiming that narrow gauge railroads would be far more economical than standard gauge ones. The engineering community responded nearly unanimously that this pamphlet was bullcrap, but the financiers didn't want to hear that.
Now, today railroads are but one cog in the economy, but in the 1870s they were often the main economic driver. So this error had huge impact.
Starting with the founding of the Rio Grande in 1870 financiers gave preference to narrow gauge -- by the mid 1870s it was almost impossible to finance a new railroad in standard gauge.
Many of the the railroad operators figured out the fallacy of narrow gauge and conversions to standard gauge were becoming more common throughout the 1870s, but they weren't public about the problems with narrow gauge because they didn't want to hurt their own stocks. The unexpected (to the financial community) collapse of the Grand Narrow Gauge Trunk RR in 1883 was the shock that made the financiers finally realize that the narrow gauge savings were a myth -- and furthermore, that in order to generate the alleged savings most of the narrow gauge railroads had cut so many corners in construction and maintenance that there existing physical plant was worth far less than imagined.
So, different era, same financial mistakes. 1) Ignoring the experts because they wanted to believe phantom profits were real, 2) Ignoring warnings signs (such as bankruptcy of smaller NG railroads) with explanations that didn't pass the smell test, 3) Finally accepting the reality when a major collapse occurred, 4) Blaming others for their failures and denying or minimizing their own fault.
Meanwhile, the harm they caused was felt widespread -- from communities that lost railroad service to those wiped out in the stock crashes.
April 15, 2009 2:10 PM | Reply | Permalink