Title: Mistaking a phase of endogenous growth with a new role for the state for a “Great Depression”: the recent financial crisis compared to that of 1873–1879
Abstract: Introduction
In the post-2008 crisis context of uncertainty concerning future growth in the
richest countries, we take a retrospective look at the validity of the pessimism
that emerged at the end of the nineteenth century about economic growth.
Indeed, pessimistic views became, in both cases, widespread among economists,
who strongly questioned the appropriateness of increasing state expenditure, and
opposed interventionist economic policies in a post-crisis situation deemed to be
the beginning of an unavoidable and great depression.
In this chapter, we shall explore the reasons for the consensus, after the financial crisis of 1873-1879, around the idea of a stationary state – in a zero
growth state – and/or on the so-called ineluctability of zero growth and finally
on the inability to envisage a return of growth (Reinhart, Rogoff, 2009). We
will briefly discuss why and how, in the nineteenth century, the pessimistic
hypothesis of a stationary/steady state was modelled in works that have now
become classics in economic literature. In short, because the economies of the
late nineteenth century were dominated by agriculture, the scarcity of land or
of good quality land was perceived as a “real physical limit” and as a crucial
factor in the transition towards a new regime of zero capital accumulation.
Classical economists could, today, be considered pessimistic due to their view
that previous economic growth was only a transitional phase: they were so
convinced of the physical limitations of growth that they developed models of
a long-term stationary/steady state economy. The “no-growth future” was seen
as ineluctable; however, not only was it not considered a repulsive scenario,
but, all in all, it became a desirable prospect from a social welfare point of
view. In view of the fact that this pessimistic school of thought has probably
had a lasting influence on younger generations, we shall re-examine the
models proposed by those thinkers, their context dependency (a context of
psychological uncertainty linked to economic fluctuations, a context where
emotions ran high following the financial crash of 1873-1879, with a vision of
a long depression in the late nineteenth century based on the belief that agricultural productivity would fall) and how this probably induced a fatalisticattitude and, consequently, a non-interventionist approach (or a “laissez-faire”
neglect in the face of an ineluctable No More-Growth phase).
The debate over this affirmation of the ineluctability of a long and “Great
Depression” was initiated by Austrian and Schumpeterian economists, but
also by American and German Institutionalist economists who insisted on and
predicted long-term structural change. Let us also note that these economists
were at the time justified in insisting on the new role the state had to play in
the institutional changes necessary as a means of remedying inertia. Today,
new evidence suggests that although those times have historically been
referred to as the “Great Depression”, they were characterised – in many
countries, though not simultaneously – by the emergence of new sources of
growth with a double origin: the effects of invisible but real waves of innovation that could de facto counterbalance the negative effects of commercial or/
and financial crises, and the effects of the expansion, by the New State, of
structural or infrastructural expenditures, which would promote growth
(Aghion, Howitt, 2009).
Our case study probably provides a good illustration of a persistent historical
tendency to underestimate new sources of productive growth in times of crisis;
new sources that have a double origin: invisible innovation flows and the expansion of (new) state expenditures. This underestimation was probably a factor in
the emergence of a climate of pessimism that explains the tendency to refer to a
new unpredicted phase of growth as “the Great Depression”. Based on how long
the phase of growth lasted (1890-1914), we dare to say that the so-called “Great
Depression” should be re-interpreted as a period of endogenous structural change
supported by New State intervention.
Publication Year: 2017
Publication Date: 2017-01-06
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot