I recently read Garraty's book on the Great Depression, as well as a few papers on the subject, and a book called "The Great Leap Forward" by Alexander Field.
To sum up Garraty's book in one sentence: Fuck if we know what caused the Depression, but it was probably low interest rates. Fuck if we know what ended the Depression, but it was probably inflation.
Let's start at the basic assumptions available:
First, expected utility theory holds throughout.
The strength of the economy is summed value of goods produced, exchanged, and consumed. We do not have an objective, empirical measure of value, so we use currency as our subjective of measure, with units like dollars or pesos.
Generally, GDP is thought to be a good measure of the strength of the economy, as it is the net aggregate of the monetary value of all production, trade, and consumption. So far, none of this is controversial.
But here's a hypothesis I'd like to put forward that might be somewhat controversial: the more evenly distributed income and wealth are, the faster the economy will grow and that periods of recession and depression occur when the majority of wealth is concentrated in too few hands.
Here's my logic, disguised as a story:
Two men are laid off from two different factories where they each had worked. For the past 10 years, one has consistently received a 3% raise annually, the other received a 1% raise annually. As a result, the first man, we'll call him Al, is significantly better off then the second, who we'll call Ben. Al has a higher net worth, maybe a nicer house, some set aside in savings. Ben's house isn't as nice, he doesn't have much in savings.
The factories where they worked have been outsourced overseas. Both Al and Ben, equally smart and talented men, realize that they need retraining in order to get a similar paying job. Al doesn't have enough money to cover his tuition, but between his house and the money he does have, he has enough padding to take out a loan to cover tuition and pay his expenses until he finishes school. He finishes, graduates, and goes to get a job that paid the same as before, maybe a bit more.
Ben doesn't have enough money for school, and not enough assets to get a loan. He ends up getting a worse job, perhaps as a janitor.
I wold posit that Ben's fate is worse than Al's, and that overall it's a slightly worse world where Ben's fate happens instead of Al's.
But wait! Why did Ben's factory pay less that Al's? Was it less productive? Let's assume that both factories produced the same thing, but Al's factory spent more on wages and Ben's spent more on CEO compensation. Alright then, if they existed in the same region why didn't Ben work at Al's factory where he would be paid more? Well, they must have existed in different circumstances, a different place in space and time. Fine then. If Ben's CEO was significantly wealthier, he would have put his money into the bank, driving interest rates down, allowing Ben to have borrowed the money necessary for his education.
But turns out, that's misleading, because the money Ben and Al are paid also end up in the bank. Either way, the interest rates in Ben's and Al's worlds remain the same.
Here are two counters from the CEO's perspective. The first is that more pay for a CEO results in a better CEO, resulting in a better company, and better chances for all. The counter is that this argument runs both ways, more pay for workers results in better workers.
The second counter is that more pay for a CEO results in a CEO is better positioned to start a new company when the first one goes under. First, that's questionable. The same money is in the economy either way, a lesser paid CEO will simply have to rely on more investment from folks like Ben and Al. Second, a better paid CEO will have less impetus to start a new company as his utility's marginal rate of return will be lower than a lesser paid, poorer CEO.
How does this hypothesis dovetail with Garraty's?
Simple. During the 1920's low interest rates resulted in wealth being concentrated in the hands of the few.
During the 1930's massive inflation with government spending resulted in a huge spreading around of the wealth.
At this point, just about every other economist in the room wants to shoot me, so I'll leave it here and hide under the table.
