Are Depressions Necessary?: [T]he current crisis has also reawakened a long-obscured, but far more profound debate about the very nature of cyclical capitalism. That is: Are economic contractions, like the one we're currently experiencing, a good thing?... [S]cratch the surface a bit and you'll find a surprisingly vibrant school of thought, one that reaches back all the way back to the Great Depression, that holds precisely this view.
Famed economist Joseph Schumpeter said that "a depression is for capitalism like a good, cold douche," one that rinses off accumulated dysfunction. Robber baron Andrew Mellon (who served as Herbert Hoover's treasury secretary) welcomed the Great Depression with these infamous words: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people" It's not hard to find this same view among bankers, financiers and sundry Wall Streeters today. Recently a bond trader told me he hoped that the Fed would raise interest rates and plunge economy into a truly deep, painful (but he hoped, quick) depression. "I don't think that would be good for you," I said. "Oh, I'd be fine," he responded. ( I meant politically: as in, there'll be people with pitchforks at your door. We were talking past each other I suppose.)... The stakes for this argument are very high: if steep economic contractions are like forest fires, a necessary part of the system's self-calibration, we should more or less let them burn. If they are more like five-alarms raging through dense city neighborhoods, we should call in the fire department.
But surely Hayes could have found a more intelligent, more thoughtful, more honest liquidationist than Robert Samuelson to highlight?
Paul Krugman, to put it mildly, disagrees. In 1999 he published a book with the prescient title the The Return of Depression Economics. While folks like Samuelson and Robert Lucas were celebrating the fruits of neoliberalism, a strange thing was happening: Financial crises of larger and larger scale and scope were wreaking havoc on the global financial system. Mostly, as Krugman notes, we ignored the tremors.... Low inflation became a central obsession of the so called "Washington Consensus," the term given for the uniform prescription of stiff free-market medicine -- balanced budgets, privatization of government services, and tight monetary policy -- that dominated global economic policy in the 1980s and 1990s. What animated much of this advice was not just a rigid and dogmatic economic consensus, but also the puritanical normative assessment that a wicked economy must now pay its penance. (Of course said penance was never paid by those who caused the crisis: It was paid out of the pockets of the starving, the poor and working class.)
It's exactly this notion that Krugman seeks, above all, to dispel. To do so he repeatedly returns to the true story of a baby-sitting co-op in Washington, D.C.'s Capitol Hill neighborhood. The co-op allowed couples with young children to have babysitters for nights out in return. In order to track people's credits, the co-op issued scrip: a coupon good for one night out. But a funny thing started to happen. People wanted maximal flexibility and so started hoarding their coupons, meaning there were too many people wanting to supply baby-sitting, and not enough who wanted to use the service. The co-op ground to a halt.
Why, Krugman, asks did this happen?
It was not because the members of the co-op were doing a bad job of baby-sitting.... It wasn't because the co-op suffered from "Capitol Hill values" or engaged in "crony baby-sittingism" or had failed to adjust to changing baby-sitting technology as well as its competitors. The problem was not with the co-op's ability to produce, but simply a lack of "effective demand.... The lesson for the real world is that your vulnerability to the business cycle may have little or nothing to do with your more fundamental economic strengths and weaknesses. "[B]ad things," Krugman concludes, "can happen to good economies."... [R]ecessions, and depressions and assorted downturns are not useful, cleansing opportunities to "purge the rottenness out of the system," but more often vicious cycles, auto-catalytic processes that result in massive amounts of human suffering, and waste human capital and an economy's productive capacity. More like the forest fire caused by a careless camper than the natural cleansings produced by mother nature....
As Krugman persuasively argues, economies need management and policy to maintain some kind of equilibrium. If we agree they need to be saved from their own tendency to spiral into disaster, to cycle through booms and busts, then it will be politics, not technical expertise, which provides the principles and rules that regulate. Samuelson and those of the Mellonist school have an innate distrust of politics; meddlesome and vulgar and prone to demagoguery. Lately the political system as seemed to be working over-time to confirm their worst fears. But ultimately there is not economics without politics, and as terrifying as this may be, economists can't save us from this crisis. Only politicians can.