Tuesday, 12 January 2010

Joseph Schumpeter and regime uncertainty

In Capitalism, Socialism, and Democracy, Joseph Schumpeter argued that policy shocks, and policy uncertainty generally, lengthened the Great Depression:
The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to a new fiscal policy, the new labor legislation and a general change in the attitude of government to private enterprise all of which can, in a sense to be defined later, be distinguished from the working of the productive apparatus as such.

Since misunderstandings at this point would be especially undesirable, I wish to emphasize that the last sentence does not in itself imply either an adverse criticism of the New Deal policies or the proposition — which I do believe to be true but which I do not need right now — that policies of that type are in the long run incompatible with the effective working of the system of private enterprise. All I mean to imply is that so extensive and rapid a change in the social scene naturally affects productive performance for a time, and so much the most ardent New Dealer must and also can admit. I for one do not see how it would otherwise be possible for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery. (p. 64-5).
This idea that government policies can effect people's view of the economy and in particular investor's confidence in the longevity of private property rights and thus the return they may get from any investment has come to be known, thanks to Robert Higgs, as regime uncertainty. Higgs's argument being that that FDR’s policies at the time of the Great Depression, prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. This lack of investment prolonged and deepened the depression in the US.

But there is nothing new under the sun. Schumpeter was ahead of even Higgs.

(HT: Organizations and Markets)


Robert Higgs said...

But no one can accuse me of stealing the idea from Schumpeter, because I quoted (with citation given) from these very passages in my original 1997 article on regime uncertainty, to which you link.

It would be pleasant to suppose that only in this regard did the great JAS precede my achievements, but, of course, he did so in ways too numerous to catalog. Among other things, he was two out of three of (1) the greatest economist, (2) the greatest horseman, and (3) the greatest lover in Vienna, whereas I am a veritable Casy at the bat for these three pitches.

As I noted in the 1997 piece, many contemporaries besides Schumpeter recognized in the 1930s that the New Deal was frightening investors and thereby preventing a full recovery of investment, particularly of long-term investment. The sample surveys of businessmen at the time confirmed that many of them expected an extreme transformation of the U.S. economy from a market-oriented system to a full-fledged fascist or socialist system or something verging on such collectivism. Nowadays people tend to pooh-pooh such observations, but I say: just go back and look at the evidence; it's remarkably unambiguous in this regard. And when you go back, try to put yourself in the place of a businessman circa 1937. Verstehende, verstehende, verstehende!

Paul Walker said...

"But no one can accuse me of stealing the idea from Schumpeter"

I wasn't trying to say that either! I was thinking more independent discovery of the idea. I had forgotten your use of the quote in your '97 article.

Actually I thinks its great idea, which I feel could be used to good measure to explain a lot of the lack of economic growth in New Zealand.