Minor illusions

“With or without the depression Wallace Carothers would have invented nylon.”
—Alexander J. Field, A Great Leap Forward

By Arnold Kling

One of the themes of Alexander J. Field's impressive new book, A Great Leap Forward: 1930s Depression and U.S. Economic Growth, is that technological progress did not come to a halt during the Great Depression. On the contrary, he claims that the 1930s were the most technologically progressive decade in our history.

Field poses and attempts to answer interesting questions using straightforward number-crunching and reasoning, rather than resorting to obscure mathematics or advanced statistics. The result is a book that represents the best of what economics can be. I will attempt to sketch some of his key ideas in this essay, but I recommend the entire book to anyone with an interest in U.S. economic history, macroeconomics, or economic growth.

Field describes the last 90 years or so of economic history in terms of six eras: the Twenties, the Depression, World War II, the Golden Age, the Slowdown, and the Tech Boom. These are summarized in the following table.

Field devotes at least one chapter to each era. He chooses the endpoints for the eras as cyclical peaks. This reflects a presumption that there are two broad factors affecting productivity: a cyclical factor, which reflects the state of aggregate demand; and secular factors, which vary by era, that affect the supply side of the economy.

Nearly the entire book is concerned with interpreting the secular or supply-side factors. Only one chapter looks at cyclical patterns, where Field finds a positive relationship between productivity and the level of labor utilization. His hypothesis is that most firms are optimized for a high level of output, so that productivity falls when the economy slumps, due to lower utilization rates for fixed assets, such as warehouses and hotels.

One interesting question, particularly given the current slump, is whether downturns have permanent economic effects, for good or ill. Field concludes that the inventions and innovations that drive changes in the standard of living seem to be independent of cyclical forces. However, this answer is already so embedded in his basic assumptions that the issue can hardly be called decided.

For each era, Field offers an interesting point of view. Sometimes, he gives a new explanation or interpretation. At other times, he takes a stand simply by omitting factors others have considered important.

For the Twenties, Field emphasizes the poor planning, inefficient land use, and naive investment bubbles that took place as developers attempted to build housing that would take advantage of opportunities created by the widespread adoption of the automobile. In Field's view, the mistakes of this era left a legacy of areas encumbered by poor infrastructure and uneconomical subdivision that lasted through the 1930s.

For the Thirties, Field provides evidence that research and development activity actually increased, in spite of the drop in demand and the decline in other forms of investment. In addition, the transportation system became more efficient throughout the decade because of continued road construction, which allowed trucks to complement railroads in long-distance shipping. (In later decades, trucks would benefit railroads less, coming to serve as substitutes.)

For World War II, Field challenges the standard bedtime story that the war got us out of the Depression and we lived happily ever after. On the demand side, Field suggests that the critical construction sector was starting to revive on its own just prior to the war, and in fact the war interrupted this recovery and diverted resources from it. On the supply side, Field examines claims that wartime factory construction, research activities, and "learning by doing" helped to "set the stage for post-war prosperity," and he finds these claims to be much exaggerated. Instead, he argues that wartime production did not have favorable supply-side effects:

Whatever positive shocks may have been associated with progress in the mass production of airframes, ships, penicillin, or munitions/fertilizer were largely counterbalanced by ... the disruption to the economy resulting from rapid mobilization and demobilization.¹

After the war came what Field and others call the Golden Age. The revival of investment and the return to full employment, along with continued growth in productivity, produced outstanding growth in per capita output. Field is emphatic in pointing out, however, that the pace of pure efficiency gains slackened relative to the Twenties and the Depression. In the pre-war decades, the United States gained more from two revolutionary developments: factories incorporating electric motors, and transportation incorporating the internal combustion engine. Those allowed us to do more with less. In comparison, the growth of the 1950s and 1960s consisted partly of doing more with more, that is, by adding to the stock of physical capital and more fully employing labor.

The Golden Age gave way to the Slowdown from 1973-1989, during which productivity growth nearly disappeared. In part, Field argues, this was due to the continued maturation of the great innovations of the early 20th century. Also, as manufacturing shrinks as a share of total output, the focus shifts to service sectors like healthcare and education, where productivity growth is more problematic to measure and to create.

The Tech Boom of the most recent two decades produced a revival of productivity growth. Field argues, however, that these gains were much more narrowly based than those of early 20th-century innovations. Thus, we do not see a return to the rate of progress we experienced from the Twenties through the Golden Age.

The Tech Boom raises important measurement issues. In what is known as Moore's Law, computer capabilities doubled about every 18 months. This makes the official estimates of quality-adjusted prices for computers decline at dramatic rates of more than 25 percent per year. Field questions whether the usefulness of computers truly increased at anywhere near that rate. If his skepticism is warranted, then official statistics overstate both the value of output and the growth in the stock of capital in the United States over the past 20 years.

Overall, there are enough interesting propositions in the book to keep an army of graduate students busy investigating their validity. I think that the economic profession would be better served if young researchers had to prove themselves on the basis of their ability to interpret economic history rather than on their ability to handle obscure mathematics.

Having said that, I would dispute Field on a number of points. For example, he minimizes the oil shock’s contribution to the Slowdown, arguing that oil prices collapsed in the early 1980s, which should have reversed the shock. In the meantime, however, the United States had diverted capital into irreversible investments in energy efficiency and alternative energy that did not serve us well in the 1980s. (Remember the Breeder Reactor?)

Field also makes no mention of the role of economic policy in the Slowdown. Most economists would have given some attention to bad monetary policy, price controls, and excessive regulation. Many economists credit deregulation, particularly of transportation, telecommunications, and financial services, with creating a more competitive economy and helping to revive productivity growth.

In fact, nowhere in the book does Field attribute any benefits to deregulation or any costs to bad government policy. He might be described as a "regulatory fundamentalist." If a market fundamentalist is someone who refuses to see any market failures or regulatory benefits, then Field is the mirror image.

For example, Field scorns financial deregulation, including “the Garn-St. Germain Depository Institutions Act of 1982, which led directly to the savings and loan crisis less than a decade later.”²

In fact, the savings and loan industry was bankrupt as of 1982. The fact that insolvent institutions were not already shut down reflected bad accounting practices and lack of political will. Attributing the industry’s demise to Garn-St. Germain is not supported by any of Field's research and is just plain wrong.

This bias toward regulatory fundamentalism reduces the credibility of some of Field's other claims. For example, he views the haphazard real estate development of the Twenties as the result of lack of regulation. He explains postwar housing performance as

in part due to zoning, land use regulations, and innovations in the design of residential subdivisions pioneered during the Depression but not having their full effect after the war ... The success of the Federal Housing Administration (FHA), which laid the foundation for potential output growth in the sector after the war, represents another positive legacy of the New Deal.³

Another possibility is that the mistakes of the Twenties reflect a natural process in which it takes time in response to technological change (the automobile) for best practices to be developed by trial and error and to then become diffused. Had there been a Federal Housing Administration in 1925, would it have known any more about how to lay out a modern suburb than real estate developers at that time?

Any historical study focusing on the Great Depression is bound to ask what parallels it has to the current period of prolonged high unemployment. The answers will not be known for many years. However, I believe more than Field that both episodes represent periods of dramatic restructuring of the economy in response to significant technological change. If my interpretation is correct, then a decade from now we will find ourselves, as we did in 1941, with a much higher level of productivity.