The Structural Problem of Depression

In 1934, shortly after Keynes’s breezy and confident letter to President Roosevelt which demanded the United States (a) control the dollar exchange, (b) massively borrow and print money for large capital expenditures to wipe out unemployment, and (c) reduce the interest rate and do everything to engineer cheap and abundant credit, former Austrian finance minister, Joseph Schumpeter, working alone as usual, quietly published a short essay titled Depressions: Can We Learn From Past Experience?. It is not among Schumpeter’s most well-known writings, but is a useful example of what I call *structural* knowledge of crisis, as distinct from so-called ‘market monetarist’ and Keynesian ‘fiscalist’ approaches.

Schumpeter’s essay draws on British and US economic history. There is one exceptional section where he describes two sets of causes and consequences of depression, and some policy problems. The explanation seems highly relevant to the advanced economies in 2013, as I will show with a few contemporary examples.

1. Internal Factors

First, a depression is always traceable to business adaptations to the preceding prosperity. There is innovation, upheaval, “intrusion of new and more efficient methods of production”, and “dislocation of everyone’s profit and loss account”. New methods (computerisation), new infrastructures (telecommunications and the internet), new or more efficient sources and uses of energy; these things eliminate some of the old businesses, and change the ways of doing business. Structural adaptation underlies “the recurrent troubles of capitalist society”, but they are only “temporary” adjustment problems. The dislocations (great losses, bankruptcies, unemployment) are, each time, “the means to reconstruct” economies and make them “efficient” again; they pave the way for “new achievement of the kind which has created modern civilisation”.