Are Depressions Necessary?

[marmar]

from the American Prospect:



Are Depressions Necessary?
The current crisis has revived an old debate about the utility of economic downturns.

Christopher Hayes | July 10, 2009 | web only


Economists, particularly those of the ascendant Chicago school of free market enthusiasts, were in a triumphant mood at the beginning of this decade. Speaking at the annual meeting of the American Economic Association in 2003, Nobel Laureate Robert Lucas went so far as to say that macro-economics -- with its focus on the stable maintenance of national economies -- could safely be retired. "The central problem of depression prevention," he said, "has been solved for all practical purposes."

But if the technical challenge of depression prevention has rudely announced itself unsolved, the current crisis has also reawakened a long-obscured, but far more profound debate about the very nature of cyclical capitalism. That is: Are economic contractions, like the one we're currently experiencing, a good thing?

You won't hear this question asked in most mainstream political discussion of the crisis. It would be career suicide for any elected official to suggest that the widespread stress, misery and heartache being wreaked by the precipitous contraction were are a good thing. But scratch the surface a bit and you'll find a surprisingly vibrant school of thought, one that reaches back all the way back to the Great Depression, that holds precisely this view.

Famed economist Joseph Schumpeter said that "a depression is for capitalism like a good, cold douche," one that rinses off accumulated dysfunction. Robber baron Andrew Mellon (who served as Herbert Hoover's treasury secretary) welcomed the Great Depression with these infamous words: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"

It's not hard to find this same view among bankers, financiers and sundry Wall Streeters today. Recently a bond trader told me he hoped that the Fed would raise interest rates and plunge economy into a truly deep, painful (but he hoped, quick) depression. "I don't think that would be good for you," I said. "Oh, I'd be fine," he responded. ( I meant politically: as in, there'll be people with pitchforks at your door. We were talking past each other I suppose.) ..........(more)

The complete piece is at: http://www.prospect.org/cs/articles?article=are_depressions_necessary

[no_hypocrisy]

1. "necessary"

Yes and no.

Yes, as a depression becomes necessary to redistribute wealth that has been acquired by a very small minority of a society and there is no other way. And that's with the presumption it's necessary to redistribute the wealth.

No, there should be other means to redistribute the wealth, e.g., raising taxes on some, lowering taxes on others, taking the money and using it for social programs that elevate segments of society that have severe challenges in survival. But raising taxes is now seen as politcal suicide. A depression becomes a passive-aggressive result of office holders acting more like politicians than guardians of their constiuents' needs.

[Birthmark]

2. Yes, If by "necessary" you mean inevitable.

There's really no way around it under Capitalism.

[jody]

3. Depressions follow periods of unlimited greed fueled by all who drive prices about their true value.

In essence, such behavior creates Giffen goods, something which people consume more of as price rises, violating the law of demand.

[scarletwoman]

4. So basically, it's a feature, not a bug.

When an economic system creates so much widespread misery on a regular basis, isn't it time for a different economic system?