The Trend of History is Bigger than the Business Cycle

By Philip Auerswald

In March, 2009, Nobel laureate Paul Krugman posted to his blog a chart of US industrial production in 1929 and 1930 (the first thirteen months of the Great Depression) comparing it to the interval from 2007 to 2009 (the thirteen first months of what Krugman referred to as “The Great Recession”). Noting that the drop in industrial production at the start of the Great Depression was about double that experienced in 2007-2009, Krugman concluded: “At this point we’re sort of experiencing half a Great Depression. That’s pretty bad.”1 With regard to trade, his take at the time was even less upbeat: “When it comes to international trade, actually it’s not the Great Depression, it’s worse,” he said in October 2009. “The scale of the collapse of world trade has been so large that it has produced a degree of international linkage that surpasses what even the pessimists imagined.”2

Of course, no sooner had Krugman proclaimed the US and global economies to be dead on arrival then both surged back to life. Indeed from the late summer of 2009, gains in US industrial production and global trade have been dramatic. Today they are both back on their historical trend – upward.

That wasn’t the first time Krugman rang alarm bells about another Great Depression. In 1998, during the Asian financial crisis, he expressed an equally dire outlook in a cover story for Fortune magazine: “Never in the course of economic events – not even in the early years of the Depression – has so large a part of the world economy experienced so devastating a fall from grace.” Without a drastic intervention, “we could be looking at a true Depression scenario – the kind of slump that 60 years ago devastated societies, destabilized governments, and eventually led to war.”3 What actually happened? The interventions Krugman advocated were not, in fact, enacted. Calamity did not ensue.

Contrast these cries of alarm with the following words from another eminent economist – call him “Economist B” – who similarly looked out a world in crisis but (unlike Krugman) glimpsed a deeper current of history flowing beneath the turbulence of the moment:

The prevailing world depression, the enormous anomaly of unemployment in a world full of wants, the disastrous mistakes we have made, blind us to what is going on under the surface – to the true interpretation of the trend of things.

For Economist B, the “true interpretation of the trend of things” featured the miracle of capital accumulation: by saving and investing in productive machines, each successive generation could produce more output than the one before, thereby increasing both per capita consumption and (potentially) per capita savings over time. As such a process followed its natural course, society would eventually reach a point where it no longer placed enough value on increasing future consumption. In other words, to use a technical term in economics: bliss.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.