Thursday, November 15, 2007
A while back I finished reading “The Grapes of Wrath,” Steinbeck’s genius novel of a family struggling with a potent combination of the Depression and technological progress in farming. As a book it is excellent, as economics, it’s certainly an argument for the Marxism which was the intellectual counter-current to the free-market ways that prevailed at the time. And it is as an economist that I will comment on this novel, its literary value notwithstanding.
The Joads were thrown into unemployment because agriculture in the United States became a capital-intensive industry. And this was during a time when, believe it or not, both capital and labor were idol, an inefficiency that baffled economists. This led to the type of thinking that the book promotes: socialism and unionization.
Economists shortly after figured out what was going on: deflation. This was something of a revolution in economic theory. Money, we assumed, was a veil, with no real importance. What was important to economists were endowments of labor and capital, the "factors of production."
Money does matter, we discovered. And what happened during the depression was a shrinking of the money supply due to runs on banks, caused by the Federal Reserve. With less money chasing the same goods, prices fell relative to wages, and companies sought ways to cut costs –in the instance of farming, they turned to capital (combines and the like). Wages are slower to adjust than the goods labor produces, consequently, “real” wages rose – those employed can buy more. Companies laid off employees as they shifted from labor to capital. So we have idol labor.
The folks laid off turned to debt to sustain themselves. With more people competing for fewer jobs, wages eventually began to fall to clear the labor market. In a futile attempt to keep wages high, unionization rose (the book notes how easy it was to break a union). Those that borrowed saw the “real” value of their debt swell: they now have to pay it off in a period of lower wages and prices. (Deflation effectively increased the interest rate.) Recall from the book those scenes at the company store .
With prices falling in the goods market first, then the labor markets, society began to fall apart. Unemployment fell further still; with less people demanding goods, goods’ prices fell further, leading to more unemployment. The vicious cycle continued. The monetary effects had devastating consequences. Recall in the book where goods were thrown into the ocean to keep prices high, all while the unemployed starved. Steinbeck writes:
"There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our successess. . . And coroners must fill in the certificates - dies of malnutrtion - because the food must rot, must be forced to rot... In the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage."
During the depression 1/5 of all banks closed, which contracted the money supply by 1/3, lowering prices by 1/2. Unemployment rose to 25%. These overall effects were not evenly distributed: blue collar household were hardest hit. This led to a worldwide recession the likes of which hadn't been seen in nearly a century,
There is little doubt that, in hindsight, the circumstances surrounding the Joads could have been averted with a monetary policy that kept the supply of money constant, a policy that the free market would have taken. And there is also little doubt that the extreme reaction to the Depression of putting the economy more in the hands of government -- wages, pensions, regulation, and the like -- to handle a problem it created was myopic. Money was important, but not in the long-term. We’ve spent the last thirty years dismantling it, and reversing stagflation it caused.
But nobody in Steinbeck’s time understood this. So we can forgive his point-of-view. Nonetheless, it gave rise to his great writing, which will endure in spite of his economics.
The Joads were thrown into unemployment because agriculture in the United States became a capital-intensive industry. And this was during a time when, believe it or not, both capital and labor were idol, an inefficiency that baffled economists. This led to the type of thinking that the book promotes: socialism and unionization.
Economists shortly after figured out what was going on: deflation. This was something of a revolution in economic theory. Money, we assumed, was a veil, with no real importance. What was important to economists were endowments of labor and capital, the "factors of production."
Money does matter, we discovered. And what happened during the depression was a shrinking of the money supply due to runs on banks, caused by the Federal Reserve. With less money chasing the same goods, prices fell relative to wages, and companies sought ways to cut costs –in the instance of farming, they turned to capital (combines and the like). Wages are slower to adjust than the goods labor produces, consequently, “real” wages rose – those employed can buy more. Companies laid off employees as they shifted from labor to capital. So we have idol labor.
The folks laid off turned to debt to sustain themselves. With more people competing for fewer jobs, wages eventually began to fall to clear the labor market. In a futile attempt to keep wages high, unionization rose (the book notes how easy it was to break a union). Those that borrowed saw the “real” value of their debt swell: they now have to pay it off in a period of lower wages and prices. (Deflation effectively increased the interest rate.) Recall from the book those scenes at the company store .
With prices falling in the goods market first, then the labor markets, society began to fall apart. Unemployment fell further still; with less people demanding goods, goods’ prices fell further, leading to more unemployment. The vicious cycle continued. The monetary effects had devastating consequences. Recall in the book where goods were thrown into the ocean to keep prices high, all while the unemployed starved. Steinbeck writes:
"There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our successess. . . And coroners must fill in the certificates - dies of malnutrtion - because the food must rot, must be forced to rot... In the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage."
During the depression 1/5 of all banks closed, which contracted the money supply by 1/3, lowering prices by 1/2. Unemployment rose to 25%. These overall effects were not evenly distributed: blue collar household were hardest hit. This led to a worldwide recession the likes of which hadn't been seen in nearly a century,
There is little doubt that, in hindsight, the circumstances surrounding the Joads could have been averted with a monetary policy that kept the supply of money constant, a policy that the free market would have taken. And there is also little doubt that the extreme reaction to the Depression of putting the economy more in the hands of government -- wages, pensions, regulation, and the like -- to handle a problem it created was myopic. Money was important, but not in the long-term. We’ve spent the last thirty years dismantling it, and reversing stagflation it caused.
But nobody in Steinbeck’s time understood this. So we can forgive his point-of-view. Nonetheless, it gave rise to his great writing, which will endure in spite of his economics.
# posted by otas : 7:31 PM
Comments:
<< Home
Don't believe him, my brothers! Fight the oppression! Dress in drab colors and sing in baritones with me! "Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks. Capital is money, capital is commodities." Or something. Whatever.
Post a Comment
<< Home
