Mistaking a phase of endogenous growth with a new role for the state for a “Great Depression”: the recent financial crisis compared to that of 1873–1879

Abstract

Introduction In the post-2008 crisis context of uncertainty concerning future growth in the richest countries, we take a retrospective look at the validity of the pessimism that emerged at the end of the nineteenth century about economic growth. Indeed, pessimistic views became, in both cases, widespread among economists, who strongly questioned the appropriateness of increasing state expenditure, and opposed interventionist economic policies in a post-crisis situation deemed to be the beginning of an unavoidable and great depression. In this chapter, we shall explore the reasons for the consensus, after the financial crisis of 1873-1879, around the idea of a stationary state – in a zero growth state – and/or on the so-called ineluctability of zero growth and finally on the inability to envisage a return of growth (Reinhart, Rogoff, 2009). We will briefly discuss why and how, in the nineteenth century, the pessimistic hypothesis of a stationary/steady state was modelled in works that have now become classics in economic literature. In short, because the economies of the late nineteenth century were dominated by agriculture, the scarcity of land or of good quality land was perceived as a “real physical limit” and as a crucial factor in the transition towards a new regime of zero capital accumulation. Classical economists could, today, be considered pessimistic due to their view that previous economic growth was only a transitional phase: they were so convinced of the physical limitations of growth that they developed models of a long-term stationary/steady state economy. The “no-growth future” was seen as ineluctable; however, not only was it not considered a repulsive scenario, but, all in all, it became a desirable prospect from a social welfare point of view. In view of the fact that this pessimistic school of thought has probably had a lasting influence on younger generations, we shall re-examine the models proposed by those thinkers, their context dependency (a context of psychological uncertainty linked to economic fluctuations, a context where emotions ran high following the financial crash of 1873-1879, with a vision of a long depression in the late nineteenth century based on the belief that agricultural productivity would fall) and how this probably induced a fatalisticattitude and, consequently, a non-interventionist approach (or a “laissez-faire” neglect in the face of an ineluctable No More-Growth phase). The debate over this affirmation of the ineluctability of a long and “Great Depression” was initiated by Austrian and Schumpeterian economists, but also by American and German Institutionalist economists who insisted on and predicted long-term structural change. Let us also note that these economists were at the time justified in insisting on the new role the state had to play in the institutional changes necessary as a means of remedying inertia. Today, new evidence suggests that although those times have historically been referred to as the “Great Depression”, they were characterised – in many countries, though not simultaneously – by the emergence of new sources of growth with a double origin: the effects of invisible but real waves of innovation that could de facto counterbalance the negative effects of commercial or/ and financial crises, and the effects of the expansion, by the New State, of structural or infrastructural expenditures, which would promote growth (Aghion, Howitt, 2009). Our case study probably provides a good illustration of a persistent historical tendency to underestimate new sources of productive growth in times of crisis; new sources that have a double origin: invisible innovation flows and the expansion of (new) state expenditures. This underestimation was probably a factor in the emergence of a climate of pessimism that explains the tendency to refer to a new unpredicted phase of growth as “the Great Depression”. Based on how long the phase of growth lasted (1890-1914), we dare to say that the so-called “Great Depression” should be re-interpreted as a period of endogenous structural change supported by New State intervention.