John Nye on the Great Depression, Political Economy, and the Evolution of the State
Sep 14 2009

John Nye of George Mason University talks with EconTalk host Russ Roberts about the Great Depression, the evolution of the State, and attitudes people have toward free markets. Nye argues that support for modern capitalism is fragile because people have trouble trusting the market process which is based on anonymous exchange with strangers. So when a crisis comes, it leads to demands for a larger role for top-down decision making. Nye sees the Great Depression as part of a larger public disillusionment beginning in World War I.

Robert Higgs on the Great Depression
Robert Higgs, of the Independent Institute, talks with EconTalk host Russ Roberts about the Great Depression, the New Deal, and the effect of World War II on the American economy. Using survey results, financial data, and the pattern of investment...
John Nye on Wine, War and Trade
John Nye of George Mason University talks with EconTalk host Russ Roberts about his book, War, Wine, and Taxes. The conversation covers the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Sep 14 2009 at 12:42pm

The downloaded file and the online stream are both damaged. There are a significant number of obvious gaps/skips/jumps. Missing content and hard to listen to.

[Hi, anonymous. Sorry you had a problem. We have not heard this problem from anyone else, nor have we had this problem ourselves downloading this file. Sometimes if a lot of people are downloading at once, immediately after we release a new file, there might be a delay. It helps to try again later. If you’d like to email us at I can try to help you out.–Lauren, Econlib Editor]

Bo Zimmerman
Sep 14 2009 at 1:30pm

Sometimes I think Dr. Roberts is a bit too hard on economics vis-a-vis science.

People will occasionally get Math problems wrong in school, but that doesn’t say anything about whether or not Math is a science because the students answer disagrees with the teacher.

Economics, like Political Science, has one foot in Ethics, where the water is ALWAYS hot. One could argue that nothing stirs human anger like impuning ones moral standards; that one is doing the Wrong thing. In Math, this is not an issue: we all agree that whether 5+5 is 10 or 11 is not a moral problem; that even Good people can be wrong in Math. However, when you have folks on the Left talking about Social Justice and the Right talking about Cutting and Running, with both having severe consequences to economic policy, it seems to me you are heading for a showdown: Logic and Science Be Damned.

At least, that’s how it looks from here.

– Bo

Otto Becker
Sep 14 2009 at 2:54pm

Econtalk delivers once again. Loads of food for thought for understanding differing world views. The point about the dichotomy between Smith’s and Hume’s view of society puts most of the political discussion of today in a good perspective.

I live in Finland where the political climate could be characterized as a mix between France and the US. That said, our policies are still lagging behind the more forward-looking countries like Sweden and Denmark. I would say that the Scandinavian mix between an open market economy and a decent social safety net is something most people in the world crave.

My own political views have come full circle in the last 2 years: from liberal to leftist, then libertarian and liberal again. This journey between political views depicts my search for the practical. Like most people, I’m more interested in ends rather than means. The biggest realizations I’ve had in my search are that it’s dangerous to think in absolutes and important to see the opposing point of view.

I think it’s not very accurate for Roberts to say that every statist intellectual only defends the state because they want to be in charge. I have several politically active statist friends. Like most politicians, their main motivator is to do good in the world. They go about their quest by using proven and practical means. This is exactly the point made by Nye towards the end of the podcast: the most practical view is neither that of the statist, nor the libertarian, but somewhere in between.

Sep 14 2009 at 4:13pm

Russ suggested at one point that the U.S. experience in the 1920s was not consistent with John’s story about a backlash against the global economy because it was relatively open. But the U.S. began to seriously restrict immigration in the 1920s. In 1921 the “per centum limit act” was enacted. It limited the number of immigrants each year of any nationalilty to 3% of the number of people of that nationality in the 1910 census. Prior to that legisaltion immigration restriction had mostly targeted characteristics of indidviduals (convict and lunatics), though attempts to prevent Asian immigrants began in the 1880s. The 3% rule was intended to reduce immigration from Eastern and Southern Europe, but I believe it is also regarded as the first attempt to reduce overall immigration.

Overall, a very interesting discussion.

Sep 14 2009 at 7:16pm

I feared the file was damaged at first but now believe it was just the interviewer speaking softly at first. After the initial problem I had not trouble. Turned it up.

Very interesting as always. If you believe Liaquat Ahamed’s _Lord’s of Finance_ Roosevelt went off the gold standard entirely against the advice of his economists. How ironic if that was really his best decision but if you believe DrNye’s thesis it makes sense because markets themselves were so new. Maybe we’ve learned a little bit although that is what we attempting to determine.

Ray Gardner
Sep 15 2009 at 1:17am

That was the best podcast ever, and I’ve been listening since the beginning.

This discussion borders on the spiritual or deeply philosophical – depending on ones’ outlook – and I plan on listening to it again tomorrow.

Not that someone who hasn’t already poured some thought into these subjects would get as much out of it, but Nye touches on some aspects of the “why” that most people never attempt.

Greg Ransom
Sep 15 2009 at 11:48am

On illegal aliens the open boarders economists don’t even think economically, much less in term of liberalregime sustaining citizen knowledge, culture and values.

A sort of mindless “libertarianism” trumps everything — and in my experience those who point to powerful economic evidence against the pro illegal alien position (e.g. the fact that illegals in California consumer more wealth in social services that they bring home in mostly tax free income) are attacked as bigots and racists 99 out of 100 times, as Russ himself does here — the economic facts are ignored, and the the attacks on character are marched out.

So the problem with the “libertarian” economists on illegal immigration is that they don’t think even economically on the matter much less in terms of the culture of liberal citizenship — it’s blind ideology all of the way down.

Sep 15 2009 at 10:28pm

Greg Ransom, the fiscal impact of illegal immigration seems to me uncertain at best. I would be interested in what sources you are using since I don’t think this is an easy question to answer. Here are a couple of interesting articles on the impact of immigrants on federal, state, and local budgets:

Although I think it is an inappropriate and too often used response to call those who disagree on this issue racists. I think there are those who, at least in part, base their beliefs on xenophobic impulses. Then there are those who have legitimate economic and logistical concerns regarding the impact on wages and ability for immigrants to be appropriately integrated into the political system. Considering we are a nation of immigrants I am skeptical of the need to sustain our “citizen knowledge, culture, and values” through our immigration policy. It seems like we have managed pretty well considering we are the most ethnically diverse nation in the world with a diverse set of cultures and values.

Greg Ransom
Sep 16 2009 at 12:34pm

AH — I live in California. I simply don’t run into the racists that “libertarians” open border people are always endlessly going on about. I simply never see it. Maybe you hang out with all of these racists. I never seem to meet them.

In California, a significant percentage of the native born Hispanic population are against unrestricted and unenforced illegal immigration and the economic and social consequences of that massive illegal immigration. And a majority of them are against “bi-lingual” education.

There is all sort of data on the economics and the social services impact of massive illegal immigration by an uneducated rural population from out of the country.

Over half of the prison population in LA County consists of illegals.

LA County has more than a 50% drop out rate.

Dozen of emergency rooms have been shut down in LA county.

The wait at your average emergency room in LA County is multiple hours, often more than half a day.

Some unbelievable number of all car accidents in LA Count involve an uninsured illegal immigrant.

And your historical / cultural observation doesn’t really have much force, given the complex facts of the past, given that you really don’t seem to understand what I’m talking about, and given the very different situation of today. And I’m surprised that you think it does.

Sep 16 2009 at 9:38pm


From an liberal economists’ perspective I believe that immigration is a similar issue to trade. There are efficiencies that are not being realised.

From a (classical) liberal’s social/moral perspective immigration restriction is a moral problem regardless of its consequences.

California’s issues with illegal immigration are partly caused by the illegal status itself: eg. emergency room care, unlicensed/uninsured drivers, non payment of taxes. They are also partly to do with a welfare states difficulty in dealing with large scale income discrepancies.

The racist/xenophobia remark is something I agree with you on. It is silly. Even if someone is a racist that doesn’t necessarily make him wrong. Arguments should be considered on merit. Still, its also silly to ignore that we have an inbuilt tendency to be pessimistic about interaction with foreigners (as some previous podcast put it).

Sep 16 2009 at 11:04pm

Greg, I am also a resident of California. I just want to say again that I’m not accusing anyone of being racist and I’m not interested in debating racism. I am interested in the statistics you cite and its relation to the impact of illegal immigration on the U.S. economy. The only one that directly relates to this, as far as I can tell, is the one saying that “Over half of the prison population in LA County consists of illegals.”

I must admit I am skeptical for a few reasons. First L.A. county only began systematically checking immigration status approximately three-weeks ago as far as I can tell. Secondly according to the California Dept. of Corrections and Rehabilitation, the percentage of Hispanics (non-felons and felons) is 37.3% male and 26.6% female in 2004. Presumably not every Hispanic in prison is illegal. Third, according to the Bureau of Justice Statistic in mid-year 2005 “Overall, 6.4% of State and Federal inmates at midyear 2005 were not U.S. citizens.” Presumably again not all non-citizens are illegal. I believe I am reading the chart right, if not please let me know, but this same report says 10.1 percent of Californian prisoners are non-citizens. Most of these statistics seems to conform relatively closely to general demographics. I did find some people quoting Investors Business Daily saying that there is a Justice Department Statistic showing “Some estimates show illegals now make up half of California’s prison population”… however I have been able to find the original source and it seems to contradict all other sources I have found. As far as drop out rates and whatnot I would be interested to see any info you have about the fiscal impact of these and how they relate to illegal immigration. Finally I would like to point out that even if you can prove that illegal immigrants present some drain on public resources it’s still necessary to show that this outweighs the cost of enforcing a much stricter immigration policy both within the United States and along the borders.


Steve Hemingway
Sep 17 2009 at 7:05am

This was an exceptionally fine podcast. I find that I enjoy the ones about political science (notably ones with Bruce Bueno de Mesquita) more that the ‘straight’ economics ones. It gave me a lot to think about. Nye was an outstanding interviewee, but you did a fine job as an interviewer, Professor Roberts.

It is a continuing conundrum to me why politicians can be relied on to ‘do the wrong thing’ as far as economic wellbeing of their population and of the world at large is concerned. This was the best discussion of this conundrum that I’d come across, albeit anchored in the specific events of political reactions to an economic event.

More podcasts on political science please!

Sep 17 2009 at 9:33am

This one is in the top ‘best of the site.’

I like to think:

If I had a week to live, what information would I collect to pass on to my son in a pinch (Morbid, but effective). This podcast is on the list.

John comes off as clear, balanced and very intelligent.

Russ is great as always.


I like the thoughts on people being generally un easy about emergent order. I work in R&D for an industrial firm. We run into 2 camps.

If something good just pops up:

#1 Wow! Look at this, lets run with it.

#2 We don’t understand it, we need to ignore it, or study it until the next millennium.

Yes. If its a big risk or dangerous, you may choose to study. Though the best is usually a combination of the two. A third camp. A run with it, use it, AND send someone off to study it style.

We rarely fully understand new things. Upper level execs and marketing types will push and ask, “where’s the new thing?” and those weary of emergent order will fall in line. Though they still hold the belief that it can’t be truly good because it wasn’t designed from scratch of fully understood prior to being implemented.

Our best product has always come from exploiting serendipity where top down design was used as a scaffold. The genius toiling away in the lab is often the guy who is mature enough to take advantage of upside luck. But that makes people uncomfortable and makes for a bad story. Most prefer the genius who comes up with everything from scratch using a grand theory and lots of math! Even if its proven bogus fluff at a later date.

Russ Roberts
Sep 17 2009 at 11:21am

Greg Ransom,

I’ll ignore your implication that my support for immigration is “mindless” and focus on your claim that I don’t understand what you’re talking about. I think I do, actually. The interesting question is whether there is still something like a melting pot or “American” culture. I think there is. I might be wrong. It’s very hard to know what evidence might be persuasive on either side. Worries about assimilation and cultural tension are not a new phenomenon. They were commonly heard in the past. Maybe this time it really is different. I doubt it.

AHBritton, thanks for your facts and calm approach.

Greg Ransom
Sep 17 2009 at 1:52pm

AHBritton — I’m certainly open to correction on any numerical question, blog posts are not journal publications, and on the fly memory is gets things jumbled often enough, I wondered about my memory of the jail numbers when I posted them …

Greg Ransom
Sep 17 2009 at 2:25pm

Russ, my claim is that the interesting thing is the economist & real life cost and benefits for, say, California citizens. I’m talking about many non-California libertarian economists not engaging that or even imagining it.

I’m saying the open borders libertarians don’t engage _those_ arguments, and its a secondary and less interesting fact that the open borders libertarians don’t engage issue regarding the sustainability of limited government given working poor immigrant voter patters, relation to the welfare state, loss of home country values in the 2nd generation within the modern American culture and system, language non-assimilation, etc.

So I think it’s telling that you miss my point.

We know there is still a melting pot. And much of that melting pot is a very good and wonderful thing. I live in California — Tyler Cowen has nothing to teach me about it.

One of the concerns of classical liberals like Milton Friedman and Thomas Sowel is the American political system and culture some parts of new poor immigrants are “melting” into. And I take it the concerns of Friedman and Sowell are not concerns of bigots or nativists, but defenders of classic liberal limited government and the institutions and culture of that classical liberalism.

The worry of folks like Friedman and Sowell really isn’t much about normal everyday “cultural tension” and “assimilation” as far as I am aware — a liberal society can tolerate lots of cultural diversity and tension and non-assimilation. The worry is about sustaining limited government and having the commonality for liberal institutions to function. The non-liberal character of so much of the U.S.’s institutions and culture today is an issue in this context.

(On the seriousness of the issue in the most extreme, non-U.S. contexts see for example Sowell’s work on non-liberal institutional structures mixed with cultural divisions which lead to violence and civil war. Note well, I’m not using this as “a warning for America”, this is an example of a form of analysis. I hope you aren’t confused by the “Godwin’s Law” effect, and can’t see the argument structure, because of the emotion raised by the particular example. I’m not talking about America, I’m providing a factual example of the mixing of non-liberal institutional changes with cultural differences producing pathologies worth taking seriously.)

Russ writes:

“I’ll .. focus on your claim that I don’t understand what you’re talking about. I think I do, actually. The interesting question is whether there is still something like a melting pot or “American” culture. I think there is. I might be wrong. It’s very hard to know what evidence might be persuasive on either side. Worries about assimilation and cultural tension are not a new phenomenon. They were commonly heard in the past .. “

Greg Ransom
Sep 17 2009 at 2:42pm

Netsp said:

“its also silly to ignore that we have an inbuilt tendency to be pessimistic about interaction with foreigners”

I simply don’t see this in the places were I’ve lived in California.

A good number of my neighbors are married to “foreigners”, all of them work with “foreigners” and most of them employ “foreigners” at home. Many of them have “foreigner” parents and siblings.

I can attest that these are happy “interactions”.

Greg Ransom
Sep 17 2009 at 3:05pm

Russ, the topic was “what are economists missing when they discuss immigration”, and my remark was about the community of economists, I didn’t personalize this remark:

“On illegal aliens the open boarders economists don’t even think economically .. A sort of mindless “libertarianism” trumps everything”

What I did address using your remarks in the discussion as an example was the way the conversation among economists very often quickly narrows into one about the nativist discomfort of opponents of mass open borders immigration.

It was a rhetorical and conversational mistake to use your remarks to illustate my point — most likely I read more into your words than actually existed there, and I distracted from what I wanted to say.

Sep 19 2009 at 9:39am

Thanks, Russ, for another fine episode of EconTalk – one of your best. I especially like John’s point that political economy issues are “not reducible to simple formulas about bigger or smaller states” and his thinking on “which sets of policy interventions create the right set of public goods”. I wonder if you might explore this line in the healthcare arena in light of the current national debate. I haven’t heard much from the economists.

Dr. Duru
Sep 21 2009 at 5:13pm

Hi Professor Roberts,
I think I neglected to save my last comments, so I am trying one more time.
Just wanted to let you and Nye know that this podcast was one of the more fascinating ones I have listened to on EconTalk (and I have dug deeply into your archives!).
I particularly enjoyed the attempt to have a balanced discussion about the political economy and history of the Depression while still offering us something new to think about and chew on. I was even compelled to read Nye’s paper – which I found to be a great read and very educational.
Please do keep the discussions on the Great Depression coming!

Sep 23 2009 at 11:25am

Great podcast, as always.

Some replies to posters here:

Bo Zimmerman, I’m not sure your math examples work. Math is not an empirical science, it uses rational-philosophical methods not empirical ones. The debate Russ is having about Economics is actually related to this, the question is whether Economics can fruitfully interpret empirical data (mainstream economics), or whether it is better off sticking to rational philosophical methods (Austrian school).

Otto Becker, I’d like to get your reaction as a European to this paper:

In fact this paper might be interesting reading for many Econtalk fans. It details the ways in which Europe lags behind the U.S., especially when EU countries are compared to individual States in the U.S. Most shocking are the figures on material possessions and consumption spending. Apparently the average Swede is on par with the poorest 20% in the U.S. Is it really true that Europeans have so few microwaves, cars, refrigerators, TVs etc.? The paper makes the case that low taxes and low government spending help the poor more than anything EU governments do.

Greg Ransom, I’ve never seen any “powerful economic evidence” that illegals hurt the U.S. On the contrary, CATO has done lots of research showing that illegals are a huge boon because they effectively allow employers to circumvent the minimum wage tax, and they are more productive than American workers when it comes to unskilled labor. They do not obtain social services because they do not want to be detected by the authorities. Also even if they are avoiding income tax remember they cannot avoid sales tax. Some data also show that immigrants end up paying more tax than natives once they have been in the country 10 years.

I direct you to this document here:

This lays out a lot of the evidence about the effects of immigration. Instead of worrying about all the car accidents, emergency room visits, etc those illegals are causing, you should instead think of how you can put them to work to benefit you. They are a huge source of cheap labor that natives can use to their benefit if they are creative enough.

Eric Prier
Sep 23 2009 at 2:22pm

Another great podcast, but I must admit that I am getting tired of hearing about economists winning the fictional Nobel Prize in Economics. As I am sure you are aware, there is no such prize – it is actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, and in my humble opinion, it is a scam. It has been a great PR vehicle in an attempt to elevate the discipline of economics to a science, and so far, it has apparently been wildly successful in convincing much of the public that economics currently has the tools to predict organizational and societal outcomes with precision. To be candid and as you might have guessed, I share your view that many of the conclusions in economics depend heavily on the researcher’s ideology, worldview, and preconceived notions but I must admit that I have held this position for at least a decade. Perhaps it has to do with my view that I see the same thing in my own discipline (political science), and it is almost tragic to continue the facade that we actually can predict the most important parameters with acceptable exactitude. In sum, I request that you please discontinue the imprecise use of the term “Nobel Prize in Economics,” and keep up the good work!

lukas schloegl
Sep 30 2009 at 1:50pm

enjoyed this podcast with a sharp-witted, challenging john nye very much! unfortunately, same technical problems in itunes as reported earlier by “anonymous” (loss of sound on various occasions).
keep up the interesting work!


Oct 6 2009 at 11:32pm

Great podcast. You do a terrific job with topics and panelists focused on Political Economics.

Comments are closed.


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Podcast Episode Highlights
0:36Intro. [Recording date: September 10, 2009.] Stylized versions of the Great Depression and what caused it. Asked to comment on influence on political economy in the Western world. Stylized story: Great stock market crash which led to panic; Herbert Hoover did nothing, replaced by Franklin Roosevelt who institutes huge policy of expansion of the State, which then eventually, by the time of WWII, cures or solves the problem. Knew it wasn't quite right, but Great Depression controversial in economics. Surprised by both how strong the consensus is and how different that consensus seems to be from what actually happened. In particular, evidence is not strong that Hoover did nothing--engaged in many stimulative activities that presaged things Roosevelt did, like trying to talk up nominal wages to stop them from falling. Strong consensus in the literature that Roosevelt, in terms of fiscal policy, did little or nothing to help the depression; but the primary thing he did early on was getting us off the gold standard. Monetary policy actions did the most to alleviate the Great Depression; what's not controversial is that his fiscal policy did very little to actually cure the U.S. Great Depression. Mainstream economics agree that his fiscal policy contributed little or nothing. School in late 1970s: general perception among educated public was that the New Deal had ended the Great Depression; but somewhere along the line that line was no longer commonly held. The new received wisdom: Roosevelt should get credit for trying really hard, but it was the war that ended it. That is the mainstream view today, with a few exceptions, e.g., Robert Higgs podcast. The mainstream view is that fiscal policy did get us out of the Great Depression, but it was the war's fiscal policy, not Roosevelt's. Leaving out the war, the single biggest thing Roosevelt did was the first year of his Presidency he got the United States off the gold standard. Friedman and Schwartz argument. Almost everybody agrees that that had a large effect in spurring the economy: one has to separate out what precipitated the crisis from what turned the crisis into a long term macroeconomic depression. Regardless of your views, there is a fairly strong consensus that neglect on the part of the Federal Reserve--allowing real interest rates to spike up or not go further down during the early part of the depression worsened the economy; not only made things worse but prevented further recovery. Standard argument is that getting the United States off the gold standard and devaluing the U.S. dollar was a kind of loose monetary policy that did what the Fed should have done. Temin and Eichengreen did not agree with Friedman about the specific monetary causes of the Great Depression--more technical matters--but they also agree that getting the United States off the gold standard was a good thing. But in their view, the Fed could not engage in more accommodating monetary policy early on because of being bound by the gold standard. Separate issue. Christina Romer evaluated Roosevelt: what he did in terms of fiscal policy did little but what he did in terms of the gold standard did a lot.
8:06Context: 1920 experience of the economy; very precipitous drop, major recession or depression, but it was very short. What happened: industrial production fell by 25%; wholesale price index fell about 40% from 1920-21. Unemployment rose from about 560,000 people to a high of 5 million people. Short lived and recovery swift. It is said that the Federal Reserve, having just begun in 1913, fueled a recovery with easy credit and purchase of government securities. President Harding made promises to roll back taxes on the wealthy; many enacted by the Coolidge administration, which generally didn't believe in doing very much. Don't do very much and don't say very much. There is a question of whether this was the same kind of crash as in the 1930--separate question. Why do we have such different impressions of these things? Both supporters and detractors of Roosevelt are basing it on a stylized fact which doesn't seem to be tied to what historians now talk about as having been relevant for the recovery. Stylized fact: deficit spending, Keynesian story that we were taught in intermediate macro taught in the textbooks of the 1970s and even today: stimulative spending. Defenders of that viewpoint have conceded that during the 1930s we weren't doing it--the magnitudes just aren't there; only during the 1940s with the war. Debate is now over it would have worked had you done more in the 1930s versus whether it wouldn't have worked at all. Separate debate: regulatory policy may have worsened things. National Industrial Recovery Act (NIRA) which really authorized monopolies and cartels and a great deal of regulation of business was designed partially to move us away from an open competitive market and to limit competition for the purpose of raising prices. Recognition that you had to do something about inflation; but use monetary policy is recommendation today. Today the consensus is that this was a failure. Even in Roosevelt's time, 1935-1936 investigation argued that this wasn't working too well. Macroeconomists like aggregate data on spending and taxes in a regression analysis; much harder to put the NIRA in a regression analysis. Part of the problem is we can't measure the magnitudes very well. Bottom line: from macro perspective, it didn't help very much. Best Keynesian case you can say is that it wasn't tried in the 1930s; worst you can say is that the things that were tried did bad things. Challenge that: defenders of Roosevelt and Keynes would say that they did work, and the reason the stories took hold--propaganda--but couldn't you argue that GDP rose pretty steadily from 1933? Yes, in 1938 another spike upwards in unemployment, but GDP rose. So, why were people so negative about the fiscal policies? Roosevelt not seen as a saviour by 1938. Mixing up two or three different things. Separate whether or not one gives credit for the policy, from a macroeconomic perspective. Initial jump right after getting off the gold standard; separate from why does a particular president get a reputation for this or that. Double dip--1937, 1938 another crash. Unemployment improves but not rosy.
16:37Political economy: level of economic ignorance always high; particularly in the 1930s; both non-economists and economists advocating foolish policies. Monopoly-cartel idea must have had some appeal. Who thought that was a good idea and why? There was a growing consensus in a subset of the economics profession in the United States that competition in the sense of Adam Smith was passe; top down was a very modern thing to do. World policies changed. Impression of Roosevelt's change had to do with a rhetoric of assembling a brain trust, a number of advisors, in particular Rexford Tugwell, one of the most vocal proponents of the idea that unfettered competition was bad; small competition was bad. Was actually in favor of big business. Believed market should be superseded by large corporations, heavily regulated. Analog to moving toward both socialism and fascism. Nazi Germany--the National Socialist Party--big business, fettered by the State, as a way to advance the economy. Rise of protection, restrictions on trade. Cannot be seen as merely naive responses to the Depression. Worldwide reaction to the general rise of the first true globalization of the 19th century. Backlash. Shattering of faith; what faith got put in place. Belief in the market--never been quite true. Human beings never fully trusted markets. Widespread markets really didn't exist or existed in very regulated interventionist form, for most of human history. Doug North, Weingast, John Wallace--limited axis order. Elites exploiting the economy for their benefit is typical of the world's history. Last half of the nineteenth century unprecedented in human history, not only for producing industrialization but for producing a world a lot closer to large-scale anonymous exchange. Relatively unmediated trade; produced benefits that were again unprecedented. From 1850-1914, the lower classes saw their incomes rise as never before in history. Huge rise in prosperity. Purchasing power, health increased as well. Sense people were getting that no one was in charge; implied fragility. Vernon Smith: human beings for evolutionary and biological reasons are not set up to appreciate large scale cooperative exchange. Deal in networks of responsibility and trust; limited to groups of a hundred people. Hayek, in The Fatal Conceit, p. 18; human impulse to take the family and expand it to the macrocosm, society at large; but that's very dangerous. We want the trust in the market to be more like the trust within families. Requires a certain schizophrenia. Market economy is supported grudgingly. Personalizing it: has to keep delivering. As economists we always anthropomorphize the economy: the market wanted to, the market intervened. Implies a consciousness that is not there. And then there is somebody to blame: it's the market. Huge pullback; but it had begun beforehand, after WWI. World so integrated now that people can't go to war was argument of the late 1900s; so WWI was a shattering experience. Odd that that should lead to a pullback with respect to the economy, but seeds of doubt started to grow.
28:09Version of that: Natural distrust of emergent order; in back of people's minds, maybe somebody really is in charge, the man behind the curtain. When the war came in 1914 it was gussied up. To kill millions of people for nothing was depressing. Settlement of Versailles, Wilson's hubris, recipe for disaster. Same goes on with the economy. Current financial crisis: "They" are in charge of it; and when it does collapse it creates a loss of faith. We'll never have a flue epidemic again like 1918 because "they" will never let it happen. But no one is in charge. Big shottery. What's unusual is that it is not unnatural to want to blame someone when bad things happen; but when bad things happen in the market economy, the support is much more fragile than in an economy which is often grounded in nationalistic or tribal or religious or ethnic instincts. Ironically. In the 1960s-1970s Mao trashing China. For much more modest bumps, capitalism is blamed. People on the ground in those systems, like the Soviet Union, extolled by intellectuals in the West, not many within the system were deluded by it. Spanish Civil War, people died with the name of Stalin on their lips. Many in the Soviet Union were moved when Stalin died. People have faith in individuals, parties. Dan Klein. People want to have communal identity. Twin peaks of Hobbes and Smith. Smith gets us to think about specialization and free exchange are mutually beneficial. Ricardian corollary--comparative advantage stems from the fact that the more different you are from your trading partner, the greater the potential gain from trade. Against that, Hobbes, who says that man's natural default is conflict and therefore the primary function of the State is maintenance of order. But maintenance of order is more difficult the more different people are; conflict is potentially greater the more different people are. Tension between maintaining order against the Smithian notion that there is more potential for growth the more different you are. Tension within the United States, relatively large suspicion of immigration, yet we are a nation of immigrants.
36:24Back to the 1920s story: relatively open time, lots of trade, lots of prosperity. Not a complete carryover, at least in the United States. In contrast to Europe, America did not suffer that much from WWI, and even economically benefited from it. Creditor nation. Stood on the sidelines and thought we were picking up the pieces. Much easier to support. Even then the United States had many leading thinkers who took advantage of any crisis to push a line going back to the end of the 19th century arguing that it's about time to think about reining in the economy or at least controlling it for the benefit of the State. Don't think there is any way to see the expansion of the State between 1820 and 1950 as being driven primarily by ideas or ideology. Any macro phenomenon--at end of Napoleonic War in 1815, no state is spending about 10-15% of GNP. By 1950, every state is consuming at least a third, often over 50%. When something is that universal, you can't point to any one thinker or President or dictator as responsible. Something is changing about the relative ability of the State to encroach on the formal economy and the relative willingness in a social sense to permit that. Pullback between the world wars; and part may be technological. Big states more likely to emerge in equilibrium. In one form or another, all small states only survived after WWII only by tolerance of the great powers. Small government and small physically. Colonies. Growth of the State; Hayek: Intellectuals and elites have a vested interest in the power of the State. Some presumably the opportunity for the engineers of the State to profit from it. Other way around: rise of intellectuals or anyone interested in promoting a non-interventionist State is the true anomaly. Real issue is why Smith has any influence whatsoever. Despite transformation of Britain from mercantilist England to liberal Britain, England was far less liberal than its propagandists made it out to be. Not anomalous that intellectuals are against a liberal State--meaning a more free and open State--because most people are against it. Inadvertent spread of anonymous exchange in the presence of elites who have a vested interest in controlling and restricting that exchange. At same time, rise of liberal world: which set of policy interventions support that kind of order. Not reducible to simple formulas about bigger or smaller states. Often hear about simplistic dichotomy; but Smithian notion is not about bigger or smaller states per se, but that states should be big enough to do all the "right things" to produce public order and necessary public goods, but small in terms of interfering with exchange. How many bad things are you willing to tolerate in order to get more of the good things? Don't think an orderly well-functioning market will emerge without some kind of state, though some push alternatives. We could imagine a state that does only the limited things, but unlikely to be stable situation. How have real states emerged, and what can we do to nudge existing states? Too much effort on ideal states. What actual transformations for the reforms that were sustained or reversed? May have been an ideological thinker or particular world view, but rare without some underlying political element that complemented the shifts in the world views. U.S. became more regulatory but not an artifact. Hoover, Roosevelt, continuity. With a different president the United States might have been less regulatory, but only at the margin.
47:53Current situation: George Bush on paper through his rhetoric a free marketer who as a lame duck practices the largest intervention of the state since the 1930s or even greater than the 1930s. Barack Obama proceeds to follow the exact same strategy; bonuses to Wall Street executives. Bush had his own stimulus plan. Continuity. Can effect changes at the margin. Current downturn: resurgence in massive protectionism have not taken place; but if unemployment hits double digits we may see it. Crisis could trigger other problems. Flu epidemic, if swine flu, H1N1 became big, would lead to clampdown on travel and free trade; unanticipated and untied things reinforce the bad views.
51:18Economic instruction: stylized version. Given point about lack of trust in anonymous exchange, could picture us as a weird little cult, tell people you should trust in this Smithian story. True people are self-interested or greedy; but there are these things called market forces that protects people from rapacious firms. Against that viewpoint, comes the occasional crisis such as the Great Depression or the current financial crisis. Even within the cult we say the invisible hand doesn't work so well--externalities, public goods. That window gets larger. At the same time, disconnect between what government actually does and what our textbooks say is justified by government. Within our cult we say "this kind of intervention is good because...". Anthropology of that, speculate? People have very different notions about what they would like. There are people who more and people who want less state interventionism and structure. Debates disingenuous on both sides because people want to not talk about the implications of their views even though they lead to things that don't strictly follow from the theory but are convenient for them. If you don't mind the state being a bit larger, you push controls on externalities, even though you are aware that if an imperfect control leads to things that are not part of the theory but expand the state, you find that as acceptable or desirable outcome. Conversely, many colleagues in favor of markets are often very skeptical of traditional values and beliefs--social conventions. Open immigration without assimilation or various moves toward an open economy may tend to break down certain types of social conventions; they say they're not going to talk about that but that we should talk about how the open economy expands wealth. Tradeoff. Don't want to say some things publically. Part of the subtext; leads to mistrust on both sides. Stimulus package: when it was put forward, some said it should be twice as big; others that it should be zero. Awkward when you have great macroeconomists--people who have a Nobel Prize or could win one. Makes you think maybe economics isn't much of a science. What they are really arguing about is should we be more like France or less like France. An honest discussion would be that discussion. Nye does a lot of work in France; the debate there is if it should be more like the United States. Election of Nicolas Sarkozy--nickname was "the American." Has to do with debates about the attitudes.