Did Capitalism Cause the Great Depression? — Laissez FaireLaissez Faire

One of the perennial claims about capitalism is that it was responsible for the Great Depression, and that FDR’s New Deal was responsible for getting us out.

Rather than debate the truth of those claims directly, I want to make a more general point about being an advocate for free markets. You don’t need to become a world expert on every economic phenomenon in history, or even give people a definitive answer about how government caused the Great Depression, in order to confidently and effectively defend capitalism.

What I think a layman has to know is two things. First, that America in the years leading up to the Depression was not a fully capitalist nation but a mixed economy. Second, that economists to this day debate which elements of that mixed economy were responsible for the Depression, and no small number of them have made strong arguments that the blame rests with government intervention.

The cause of the Great Depression is not self-evident. Determining what led to such a complex economic event is not easy to do, and for the vast majority of Americans, their belief that the Depression was caused by capitalism is not a conclusion reached after careful thought and study—it’s just something they’ve always heard. If you ask them how capitalism caused the Depression or why they believe that account, and then let them know there are alternative explanations, that is enough to make it clear that your views can’t be dismissed with a sound bite.

But it’s important to realize that just as it’s wrong for people to think they know that capitalism caused the Depression because that conclusion is consistent with their anticapitalist ideology, so it’s wrong to think that we know government intervention was responsible simply because that’s consistent with our ideology. We can know that, but it takes careful thought and study.

In the video below, Yaron explains a number of the ways in which government was intervening in the economy during the 1920s and 30s, and why this is a plausible explanation for the Depression. I’ve also listed a few other resources I found helpful in thinking about the Depression. These are good places to start if you want to reach a real, first-hand view on the matter.

Books 

• Burton Folsom, Jr. – New Deal or Raw Deal?
• Amity Shlaes – The Forgotten Man
• Jim Powell – FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression

Online Resources

• Chris Edwards – “The Government and the Great Depression”
• Scott Sumner – “It’s Complicated: The Great Depression in the U.S.”
• Lawrence Reed – “Great Myths of the Great Depression”
• EconTalk – Numerous interviews on the Great Depression