A Theory of Great Depressions

 

I had wanted to study the Great Depression as a graduate student at the University of Wisconsin-Madison in the late 1970's. My pitch was that the Great Depression was a "Systemic Event" and therefore should be studied from the perspective of Systems Theory. I received two responses: (1) Systems Theory had a "bad reputation" in the Social Sciences and (2) the  Great Depression was a topic reserved for elder statesmen in Economics and was not appropriate for a graduate student. I went on to apply Systems Theory to Late Nineteenth Century Development in Germany and emphasized the systemic issue of Stability. Today, I am at the end of my career, I'm still interested in the Great Depression and I don't need anyone's approval to study it.

What I have found is that there is really no consistent theory of Great Depressions and that Systems Theory in the Social Sciences is, unfortunately, poorly defined (it is clearly defined in Environmental,  Engineering and Biological Sciences). So, let me cut through confusion with a model from Environmental Sciences (the Kaya Impact Model above), develop a model of Great Depressions (at the start of this post, see the Readings below for more background) and then describe how this all relates to the perspective of Systems Theory.

The Kaya Impact Model is an identity (true by definition) that the IPCC uses to summarize the drivers (N= Population, L = Labor, Q=Production, E=Energy Use, CO2=Emissions) of Global Temperature (T). Any increase in these "extensive" variables will ultimately increase T unless the "intensive variables"** (l=L/N, q=Q/L, e=E/Q and c=CO2/E) change.*** There is nothing in the Kaya Impact Model that would create a Depression unless some exogenous shock disturbed the Extensive Variables.

The directed graph at the beginning of this post describes the "Shock" model. Negative shocks to Population, Labor, Exports or Global Temperature might create a downturn in Q. The size of the downturn would be determined by the size of the shocks. During the period 1900-1950, what might those shocks have been? The most obvious shocks are from WWI and WWII. The Wars displaced populations, diverted Labor to War production and combat, interrupted (seriously) foreign trade and had severe Environmental impacts.

Systems Theory enters into this discussion by pointed out how inadequate the directed graph at the beginning of this post actually is: (1) Does it describe the entire World-System or just one country? (2) If we are talking about the interaction of multiple countries (the US, the UK, France, Germany, Western Europe, Japan, etc.) the other countries in the World System might also be sources of transmitted shocks. (3) Neither the Kaya model nor the Economic Shock Model contain Feedback Loops, that is, how a single country or the World System itself respond to shocks, if at all. 

Just to be clear, Systems Theory provides methodology for: (1) Estimating multiple systems models for each country in the World-System and for the World System itself.**** (2) Understanding how the models are connected to one another and to the World System. (3) Describing feedback processes within each country and within the World-System. And (4) Asking why feedback process did not adequately respond to transmitted shocks to prevent Great Depressions from happening.

Systems Theory has answers to these questions, but (1) systems questions are not adequately stated or testing in the existing literature and (2) getting the answers requires some hard, advanced statistical work.

I have estimated statistical models for all the countries and regions in the World System for the period 1900-1950 and for which data is available to me. The models are presented as R-code and can be run on the Google Site World in Depression. Information about data sources and how the models were constructed is available in the Boiler Plate.

In future posts, I will discuss each of the models, how the are linked to each other and their hierarchical role on the World-System. This analysis will not yield simple, monocausal explanations such as "The US failed to expand the money supply" or "The Free Market was corrupted by political interference" or "The US Stock Market Crashed". Systemic events have complex causes with complex explanations. I will work system-by-system, letting the models and data speak for themselves.

Notes

** For example, "Energy Intensity" is  e=E/Q.

*** As parameters of the Kaya Model, the intensive variables are assumed to change slowly over time. For example, Energy Intensity (e=E/Q) is not assumed to change from year to year.

**** Following the terminology of World-Systems Theory, when I use the term "World-System" I am referring to a system-of-systems (country models) related by trade and Geopolitical Linkages. When I refer to "World System" I am referring to a World model over a specific period of time, for example, the W_E20 model.

Readings

• Peter Fearon (1987) War, Prosperity and Depression, The US Economy 1917-1945. A good summary of the Economic Thinking on the Great Depression.
• Charles Kindleberger (2013) World in Depression, 1929-1939 The best understanding of the Great Depression as a World-wide, Systemic Event.
• Charles Kindleberger (2015) Manias, Panics and Crashes: A History of Financial Crises What causes departures from the Attractor Path. 
• US Government (2008) Outline of US History, Chapter 10, War, Prosperity and Depression. The "official" history for the US! 
• Immanuel Wallerstein (2004) World-Systems Analysis: An Introduction.
• Ludwig von Bertalanffy (2015) General System Theory: Foundations, Development, Applications Kindle Edition