How Do We Define the Great Depression?

 


Our current approach to Economic Policy is based on our understanding of the Great Depression. Google Gemini notes that:

I will argue that, as a major Economic System Failure, we have mostly not studied the period from the perspective of Systems Theory, starting with the definition (the graphic above provides a concise summary of our misconceptions).

The Great Depression has been studied so much that the definition might seem obvious. Here's Google AI's statement:

Hidden in the definition are a number of assumptions about economic performance during the Early 20th Century. I'll dig into these issues in this post.

The graphic at the beginning of this post shows US GNP for the period 1900 to 1950. First, imagine that you were standing at the start of the 20th Century before WWI. What would you have predicted? Could you have predicted WWI? Here's Google AI's statement:


For the moment, assume you could not predict WWI and were using data from 1900-1915. Now you just started drawing lines on paper. The reasonable conservative forecast would have been line A, linear growth for the next 50 years. Notice that you would have captured the "bottom" of the Great Depression as just a Business-as-Usual (BAU) point.

Now imagine again being in the US and having lived through WWI. Let's say it converted you into an optimist and you quite enjoyed the Roaring Twenties. Given economic performance during the war, you might have predicted the line WWI this time. But, the economy actually returned to a more conservative time path, line B, that lasted until the Stock Market Crash of 1930.

Given the depth, breath, and length of the Great Depression, your optimism has not been entirely shattered. You still regard the US as the Arsenal of Democracy, so you predict a recovery on line C (your downbeat friends are still stuck on line A). But then WWII comes along and you see what the WWII line is capable of producing economically.

If you go back and connect the dots with line B, the time from 1930-1945 shows the period to have been one massive Great Depression, so that's what you call it. You have now entirely forgot line A and are ready to move into the Post-War period with unbounded irrational exuberance. You have entirely forgotten the Roaring Twenties because it isn't repeated after 1950.

Yet you know you are just drawing lines on paper and that you could not have predicted the events of the Early 20th Century and the Inter-War period. Have we just been deluding ourselves with imaginary lines and after-the-fact thinking? Are we taking the right lessons from this period? As a matter of policy in the 21st Century, did we know what we were doing? Here's what ChatGPT reports:


However,** the 2008 Financial Crisis, the COIVD-19 Pandemic, the two Trump Administrations, and MMT (Modern Monetary Theory) have come along to shake the foundations of our understanding of the Great Depression. Google AI:



My argument is that Systems Theory provides a different interpretation of the Great Depression and provides a different framework for macroeconomic policy. In future posts, I will develop a different understanding of the Great Depression based on Systems Theory and then go on to apply it to the post-War period.

Since so much work has been done on the Great Depression, drawing lines on a time plot of US GNP will not be very convincing. My approach will be to uses State Space Systems Models to study all the major affected countries in the World-System during the early 20th Century. Here is a Blog Roll of my work so far: Blog Roll: The Great Depression.

State space models will be documented as R-code on a Google Site here. For more information on data sources and how the models were constructed, see the Boiler Plate.





Notes

** Simply looking at the graphic at the beginning of this post, I cannot conclude that Monetary manipulation or Demand Simulation would have kept the Economy, at least, on path B but that seems to be the Modern Economic Policy argument.

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