Marian Tupy: Hello and welcome to a new episode of the Human Progress podcast. Today I have with me Don Boudreaux, who is a professor of economics at George Mason University, and he has a new book out together with the former senator from Texas, Phil Gramm, called, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism. Highly recommended. It’s a fantastic read, full of information, killer arguments. So let’s begin. Don, this book is just as much about economics as it is about history, or put differently, it is a historical account of important economic events such as the Industrial Revolution and the Great Depression. Why is study of economic history important?
Donald Boudreaux: Well, first of all, thank you for your kind words, Marian, about the book. I really appreciate it. And I’m very happy to be here with you. So in a way, the answer is obvious, right? We know what we think we know about the past determines how we assess current policy and the future. If we think that in the past, monetary policy did this or did that, then that’s gonna affect how we think monetary policy should be conducted today. If in the past we think that tariffs were used successfully to help America industrialize, then we’re gonna be more favorable toward tariffs today. So we have to know how various policies, or do our best to know how various policies in the past worked to give us some guidance to understand if and how they’ll work or not today. And history, of course, can be used. It can also be abused and misused. Most of the misuse of American economic history I believe, is purely innocent. People look at raw data, raw facts. They don’t filter those raw data or facts through appropriate theory. We can only understand facts and history by having some theoretical way to weave them together to make sense of them. And so that’s what we try to do in the book. We look at history, American history, with a little bit of English history as you know, in order to be able to get a better grasp of how current policy debates might be improved. If we can correct historical misunderstandings that affect policy discussions, we might make today’s policy discussions more productive.
Marian Tupy: Right. I’m also a big believer that history holds lessons that we should learn from. Conditions change, but human nature remains the same. And on a macro level, when it comes to debates, the big debates between the left, the right, and the classical liberals, the question is, like when it comes to the Great Depression, who was responsible for it? Was it the excesses of capitalism? Was it something that the state did? So by learning the right lessons, you can also sort of you also form your views about capitalism, about the free markets, and about the state intervention in them.
Donald Boudreaux: Yeah, I mean, there’s a famous statement in America. A lot of people attribute it to Mark Twain. I think it actually comes from an old American humorist named Josh Billings, who said something like, The problem, it’s not an exact quotation, but the problem ain’t what we know, it’s what we know that ain’t so. So when we have fallacies in our mind about what happened in the past or what didn’t happen in the past, that will inevitably affect our understanding of our current situation. And that understanding will make policy good or bad, depending upon how good or bad that understanding is. And there’s a lot about the American past, a lot about the past in general, of course, but certainly about America’s economic past that people think they know. That in fact simply isn’t so, and I’m sure we’ll talk about some of those things in the next several minutes that we have together.
Marian Tupy: Very good. So let’s jump right in and tackle the first one of them, which is, of course, Industrial Revolution. What is the foundational myth of the Industrial Revolution? Why do you think it’s wrong?
Donald Boudreaux: Foundational myth. First of all, no one doubts there was an industrial revolution. The wealth explosion, as Steve Davies calls it, the great enrichment, as Deirdre McCloskey calls it, it has a bunch of names, but no one doubts that starting about 250 or so years ago in the northwestern part of Europe, the material prosperity of those societies started going way up in a manner that it had never done before in human history. So what caused it? The foundational myth is that the rich capitalists, the elites, the landowners, the factory owners, they did get rich, but they got rich by extracting that wealth, that extra wealth from the poor. They basically crushed the poor beneath their well-heeled heels, and they worked their factory workers harder, and they extracted more surplus value from labor, and that created this wealth explosion. Now, it may be some of these people who peddle this myth will say, “eah, later on that wealth managed to somehow trickle down much of it to the general population, but early on, in the first several decades of the Industrial Revolution, that extra wealth came from making poor people even poorer than they were already.” That’s the foundational myth. It’s wrong.
Marian Tupy: Let me ask you, how much of this is due to Marx? Marx’s theory was that because all profits grow to zero or decline to zero, in order for the capitalist to make money, he needs to take as much money as possible, eventually driving to zero people’s wages, right? So is that the source of the poison, or were people skeptical about the Industrial Revolution before Marx became popular in the 1970s, after 1917?
Donald Boudreaux: Yeah, there were people before Marx who had a similar view. Marx, of course, turned it into the elaborate, complex theory. But one of the beneficial things about writing this book is I read things that I otherwise wouldn’t have read. So I read the English-language translation of Friedrich Engels’ 1845 book. So it came out three years…Oh, 1844. It came out a few years before The Capitalist Manifesto, conditions of…
Marian Tupy: The Communist Manifesto, not The Capitalist Manifesto.
Donald Boudreaux: Oh, yeah, The Communist… The Communist Manifesto, my gosh. I just recently read Johan Norberg’s Capitalist Manifesto, so it was on my mind. Much better book, by the way. So I read Friedrich Engels’ Conditions of the Working Class in England, and he has these remarkable statements in there. As far as I can tell, based upon no real research, but he makes these claims that, well, you know, prior to the rise of the factories, you know, English peasants lived happy, lovely, healthy lifestyles, you know, out in their rural villages, and they would frolic by day and do a little bit of work from time to time, and then they would sing songs and hold hands, and everything was lovely. Then along came these factories, and they started employing these people, and then that really made the ordinary peasant’s life much, much worse. And it’s from the extraction of the value of the output from these peasant workers that the wealth of the English capitalists was taken, and that was the source of the wealth of the Industrial Revolution. So you read this stuff by Engels, and there were others who wrote similar things, and you look in there for evidence.
Donald Boudreaux: So why is he saying this? Does he have any evidence? Does he have any citations? And there’s nothing. It’s just his speculation. I don’t know. Maybe he spoke to someone who has these weird recollections. But then, when you look at the actual historical record of what life was like…
Marian Tupy: Yeah, it seems I never read the ’44 book by Engels, but it does feel like a perfect distillation of the Romantic counter-nlightenment, where the Romantics, for a variety of reasons, became obsessed with nature and developed this image of a bucolic past where the peasants, once again, were running around happy, and then capitalism came and destroyed it all. But we know that the Romantic view of the economy before the Industrial Revolution was just profoundly wrong. Yeah, I always thought that one of the most ironic things about Marx was that even during his lifetime, I think he’s born in the early 19th century, dies in 1883 or so, wages of the British workers have actually increased by some 130%. But there’s always a question about, was there a pause? Was there an early part in the Industrial Revolution where the wages stagnated, and only then, later, they took off? Or was there a general improvement in the condition of the English workers in the 19th century during the Industrial Revolution? What’s your take on that?
Donald Boudreaux: So I’m not a professional economic historian, but in writing this chapter, I read a great deal of the research on the serious scholarly research on early English Industrial Revolution. And I don’t believe that there is a consensus among economic historians about just when the wages of ordinary workers began to rise in a sustained way. Everyone agrees that it’s no later than the 1840s. By 1840, wages have risen and are rising. The question is, when did they begin? My belief, from distilling all the research that I read, is that wages began to rise for ordinary people in the middle part of the 18th century. Now, at first, it was slow. And I think this is corroborated by reading Adam Smith. If you read The Wealth of Nations, Adam Smith was clear that he saw around him increasing standard of living of ordinary British working men and ordinary British people. It wasn’t, by our standards, it was still pretty poor. Adam Smith he published The Wealth of Nations in 1776. And so by then, he’s seeing something. And there are different economic historians.
Donald Boudreaux: There’s Gregory Clark, there’s Jane Humphreys, Deirdre McCloskey, and they have different dates, but they range from the middle part, when the sustained rise began, the middle part of the 18th century. Some people actually will go back further and say, well, it really began to rise in the late 17th century. I’m not sure about that, but they certainly began to rise, in my view, by the mid-18th century. And by the time we get to the second quarter of the 19th century, those wages are rising in Britain, pretty steadily and unmistakably.
Marian Tupy: Yeah. I also want to plug in the idea that standards of living can increase because your wages are increasing, but also because prices of food, for example, are declining. One thing we found in our research was that during the 18th century, because Malthus comes up with his book, with his essay on the principle of population in 1798, but during the 18th century, the prices of wheat have declined by something like 40%. So you have the wage increase and decline in prices. And this is why, perhaps, somebody like Adam Smith can see abundance around him.
Donald Boudreaux: Yeah. The research that I was referring to that I read, the modern research, the 20th and 21st century research, these scholars take that into account. They try to calculate real wages by looking at the take-home pay divided by the prices of the basket of goods that ordinary people bought.
Marian Tupy: That makes a lot of sense. One last question on the Industrial Revolution. Part of the mythology is that you needed the state to step in and stop children from working, and also to give them education. I know there’s another side to this story. So what was the reality behind the social conditions?
Donald Boudreaux: Well, obviously, the most obvious thing to say is that prior to the rise of factories, prior to the Industrial Age, it’s not as if children were staying home playing soccer or football with each other. They were working. They were working on farms. There’s some debate, I think serious debate, about whether or not when the factories arose, whether the intensity with which children were employed in the factory was greater than or less than the work they did on the farms. But it isn’t as if the children were frolicking and free of work before the factories and suddenly became workers. People were too poor not to have everyone in the family who could possibly contribute to adding to the material sustenance of the family to so contribute. So children always worked. Hayek, F.A. Hayek, who, as you know, I’m a great fan of Hayek. Hayek, in 1954, edited this wonderful little book on the Industrial Revolution.
Marian Tupy: Economics and historians, I think.
Donald Boudreaux: Yeah. And he has an essay in there by the young William Hutt, W.H. Hutt. And Hutt presents evidence that, yes, children were working in the factories, but they weren’t, by the standards of the day, they weren’t being abused. The factory owners weren’t these cruel, Dickensian, heartless masters who were driving the children to their death. And Hayek argues, I think in the introduction to the book, or another essay in the book, Hayek argues, and this makes sense to me because it explains a lot of other historical facts of the same sort, that the legislation, in a way, followed the change in wealth. It’s precisely because society was becoming richer that it dawned on people for the first time to be concerned with children working so much in factories. And so society’s becoming richer, and there’s already developing a resistance to having children working so much in factories. Children had… The use of children in factories had begun to decline, and the legislation pretty much only codified those social movements, those social developments that were already in place. That seems to fit the facts of the case. It isn’t the case that… It’s certainly not the case that the factories were prosperous only because they were extracting blood and value from nine-year-olds, and then the British Parliament rode to the rescue in the 1830s and said, No more, you may not do that. And then children were saved, and everyone lived happily ever after. That’s a very childish and incorrect understanding of what happened.
Marian Tupy: Yeah, it’s one of the most misunderstood, I think, points about the Industrial Revolution. I think that the way that it needs to be explained, or something I tried to do before, is that it was pointless in the 18th century, for example, for people to think about are we going to abolish child labor? Because every child was employed, right? It never occurred to anybody that there could be such a thing as a childhood without work. It’s only in the 19th century, after a certain fraction, certain share of the English labor force has enough money to take their children out of work and put them in schools, that suddenly dawns on humanity, wait a second, it’s possible not to have children working. But that would have been an inconceivable idea in the 18th century and hundreds of thousands of years before that.
Donald Boudreaux: Yeah, we can’t… You know, we’re so rich today, we can’t… It’s very difficult for us to conceive how life was for ordinary, well-meaning people. If you’re on the verge of starvation, as so many of our ancestors were, even in Western Europe until just a few centuries ago, then you can’t afford to have your healthy children doing nothing. The moment they can help produce something, you put them to work doing something, whether it’s on the farm or whether it’s in that new fangled factory down the street where they could pick up a few extra pennies by working to help to keep the family alive. And that was the norm. No one thought it was especially cruel. People began to see it as cruel, ironically, only as we became richer.
Marian Tupy: That’s right. Moving on to the second myth, trusts, or as we call them today, monopolies. We hear a surprising amount about the power of monopolies today, in today’s America. Just yesterday, I was giving a talk at GMU, and somebody asked me about the power of monopolies. I’m not sure why, given that the same people who are complaining about power of monopolies in economics have absolutely nothing to say about monopolies in education, government monopolies in education, or provision of health care, and so forth. But let’s go back to the 19th century, which is what your book is concerned with primarily. What was the trust problem, and what was the solution meant to address?
Donald Boudreaux: So, you know, some of the earliest original research that I ever did as a young scholar back in the 1980s when I got out of graduate school and started my career teaching at George Mason, was looking into the actual history of the Sherman Antitrust Act, which was enacted in 1890. And I had the good fortune I had a colleague, Tom DiLorenzo, who had just published a wonderful paper on the origins of the Sherman Act. And in that paper, Tom went… So this paper was published, Tom’s paper was published in 1985. So, 95 years after, nearly a century after the enactment of the Sherman Act. And astonishingly, no one in that near century-long period had ever bothered to look to see what actually happened to the prices and to the outputs of the industries in the 19th century that supposedly were monopolized, that supposedly required the intervention of government to save consumers from monopoly. So Tom looks at these data, he goes to the congressional record, figures out, okay, this firm, that firm, that industry, these are all mentioned as monopolies. We can get data on a lot of these, on outputs, prices, and Tom adjusted them for deflation.
Donald Boudreaux: It was a deflationary period from the end of the Civil War until the early 20th century. And what Tom found is that in the decade leading up to the Sherman Antitrust Act, so in the 1880s, the prices of the allegedly monopolized industries, the prices of their outputs, they not only fell, they fell faster, much faster than did prices for the economy as a whole. And this is inconsistent with the monopoly story. Monopolies are supposed to raise prices, not cut prices. Outputs of these industries not only rose, rose faster, and in almost all cases, much faster, multiple times faster than did the output for the economy as a whole. And it was a booming period by and large. So this is completely inconsistent with the monopoly story. Monopolies are supposed to restrict output and raise prices. And so I began to look a little bit, partly doing some work with Tom DiLorenzo, look more deeply into what went on then. And in 1889, not 1890, in 1889 several U.S. States enacted antitrust statutes, things that were called antitrust statutes. And you look into the history of this, and just to summarize, here’s what we found. There was no monopoly problem, true monopoly problem in the 1880s.
Donald Boudreaux: What there was was a competition problem. There was an entrepreneurial innovation problem. By the 1880s, we had for the first time, we had a fully transcontinental economy connected by the railroads, physically connected communication-wise by the telegraph, and then soon thereafter by the telephone. So a lot of firms can now take advantage of economies of scale that before were impossible to take advantage of. And you had some entrepreneurs who, fortunately, took advantage of these. John D. Rockefeller in petroleum refining, one of my great heroes, Gustavus Swift in meat slaughtering, James Buchanan in tobacco manufacturing. And so these firms, they did grow large. And so if you equate monopoly with big, well, it certainly was an era in which firms got big, but that’s not an appropriate definition of monopoly. An appropriate definition of monopoly is a firm that can so reject competition, suppress competition, that they’re able, these firms are, to raise prices and suppress output. These firms did the opposite. They grew big, but they grew big precisely by being so efficient that they lowered their prices and expanded their output. Now, when this happens, people complain. And you had producers in the 19th century who complained about this. Mostly, shockingly enough, we don’t hear about this today, but disproportionately by local butchers and local cattle raisers.
Donald Boudreaux: Before the railroad and before refrigeration, all meat slaughtering took place locally ’cause there was no refrigeration to use to transport meat. And of course, if it’s not refrigerated, it goes bad very quickly. And so when the first meat packers, as it came to be called, set up shop in Chicago, started centrally slaughtering beef and pork in Chicago, and then shipping this stuff out across the nation by refrigerated railroad car, that destroyed an ages-old line of work, local butchers and local independent cattle raisers. They, for reasons that are not quite clear to me, but it’s clear that it’s the case, they had a lot of political power, these butchers and cattlemen. So they raised hell. And the local politicians listened to them. And basically, the local politicians said, “We want to do something about this.” Well, look, these big meat packers, they’re growing big. And there were other firms growing big too, John D. Rockefeller, American Tobacco, Carnegie Steel. Big is bad. And so we’re going to pass an antitrust statute that will show that we’re attacking this business, but all the firms that were villainized, all the industries that were accused of being monopolists during that era, these were firms that were highly entrepreneurial.
Donald Boudreaux: These were firms that were not making profits by raising prices and suppressing outputs. These were firms that won their profits by lowering prices, improving the quality of their product, by the way, also, and expanding outputs. Consumers loved it. And the early antitrust statutes were protectionist measures. That’s what they were designed to be. They were designed to be protectionist measures. That’s what their supporters hoped they would be used to be. Now, as things go, legislation is always a series of compromises. And so the wording of the Sherman Act is famously vague or infamously vague. But there’s no doubt in my mind. And frankly, I don’t think there’s doubt in the mind of anyone who studied this history with any care that the early antitrust statutes, and the follow-up ones, by the way, were not at all meant to address what was truly perceived to be a problem of monopoly. They were aimed at placating disgruntled producer groups who were upset that they were being outcompeted by larger, more efficient, more entrepreneurial rivals.
Marian Tupy: That’s interesting. So your explanation basically confirms the conversation I had only, what, less than 24 hours ago, because nobody suggests, for example, that Apple is a monopoly in a sense that you cannot walk into a Verizon store and pick up an Android phone. They have a problem with bigness. It’s a $2 trillion company. That itself is scary. Why is big… To Don Boudreaux, why is big good?
Donald Boudreaux: So big isn’t good in and of itself. But big is not bad if big is the product of competitive market processes. Depending on the particular industry, if the firm can improve its efficiency by serving an ever-larger market, well, then the firm is going to become big. And if the firm does that, then the bigness is a result of its entrepreneurial creativity and gumption. There are some industries in which economies of scale are not readily available, and so firms in those industries don’t grow big. So I don’t say big is good or bad. Again, if big is the product of competitive processes, then there’s nothing bad about big. It’s just one of the results of the competition. And people will say, I get this argument quite a lot, say, “Well, okay, maybe the firm became big by being efficient. It didn’t do anything wrong to attain its large size. But once it has its large size, then it can abuse that power.” And I guess theoretically, you can tell a story where that might happen. Right now that Apple is big, then Apple can crush its competitors. Here’s where history really comes in handy.
Donald Boudreaux: We can tell a theoretical story why that might not happen. Well, no matter how big you are, if someone has an idea for a better mousetrap, they can get funding from the capital markets and pretty much set up shop to compete with you right away. Other people can say, well, no, that’s unrealistic. So we look at history. What does history say? History knows no instance, at least I’m unaware of them, and I’ve looked, knows no instance of a firm that was able to maintain its market position and market size just by virtue of being big. Firms that remain big and remain successful did so only and only insofar as they continue to serve consumers’ interests. The moment they fail to do that, relative to how some competitor is serving consumers’ interests, those firms shrink. Some of them go bankrupt. I remember, I’m old enough to remember, maybe a handful of the listeners here, Marian, will remember. I remember back in the 1970s when my fellow Americans were saying, there is no way any car companies could possibly compete with the big three, General Motors, Ford, and Chrysler. Impossible. You’re naive to think that that’s possible.
Donald Boudreaux: No one would say that now. I remember when people were worried about the size of Sears Roebuck. Because in the 1970s, Sears was kind of like the Amazon.com of today. It was the dominant department store. It was catalog, and it had some brick-and-mortar stores. And I remember thinking as a young man, wow, Sears is going to be around forever. Who could possibly compete with Sears? We now have Amazon. I guarantee you, Marian, if you and I live long enough, certainly if some of the younger listeners live long enough, people will be saying, “I remember when Amazon was a dominant player.” And their children will say, “What’s an Amazon?”
Marian Tupy: That’s right.
Donald Boudreaux: That’s the way markets work. As long as entry is free, as long as we embrace entrepreneurial innovation, someone’s going to come along, build a better mousetrap, build a better retail store, build a better way to make automobiles and distribute automobiles, and the formerly dominant firms that no one imagined could be outcompeted, they’ll become history. That is the story of economic history. I challenge anyone to point me to any firm that grew large because of its market competitiveness, because of its entrepreneurial gumption, and then stayed large only because it was big, that somehow managed to abuse, once it became big, abuse consumers by raising prices, lowering quality, restricting output. They just don’t exist. Now, you have firms that, when they grow large, they’re better able to grasp political power, and that political power can help protect them from competition, but that’s very, very different. That’s a categorically different phenomenon than maintaining your position in the market through entrepreneurial competitiveness.
Marian Tupy: Don, have you ever taken a flight on Pan Am? [chuckle]
Donald Boudreaux: I did, yeah.
Marian Tupy: That’s another company which was a giant of its day.
Donald Boudreaux: Pan Am and TWA, the first time I flew to Europe, it was on a Pan Am flight. That was 1987, but I haven’t thought about Pan Am in ages.
Marian Tupy: That’s right. I think they went bust in 1990 or so.
Donald Boudreaux: Yeah, I remember Braniff Airlines.
Marian Tupy: Good Lord.
Donald Boudreaux: Yeah, yeah. History’s full of these allegedly… I don’t mean to be too insulting, but people are too arrogant in their own imagination sometimes. They look at a big firm like Amazon today, and they can’t think of a way to compete against Amazon. And it’s true, they can’t, in most cases. And then they conclude that because they can’t think of a way to compete against Amazon, then it must be the case that no one can possibly think of a way to compete against Amazon. Well, you know, there are more than 8 billion people in the world. It’s quite likely that at least one of those 8 billion is going to have an idea that you don’t have, and they will find a way to compete against Amazon if Amazon stops serving its consumers as well as possible.
Marian Tupy: A couple of answers ago, you mentioned the D word, destruction, destruction of local butchers by big centralized butchers, which leads us to the whole notion of Schumpeterian creative destruction. Why is that a good thing?
Marian Tupy: Meaning, you know, when you say a job is getting destroyed, a small mom and pop shop destroyed by Amazon, a small butcher somewhere in Missouri destroyed by a big conglomerate in New York or New Jersey, people suffer. Why shouldn’t we keep them in business? What’s this creative destruction? Why is that good for us?
Donald Boudreaux: Well, first of all, if you want economic growth, then economic growth implies economic change. Economic change requires resources being moved from where they are less productive to where they are more productive. And so change is inevitable if you want economic growth. Some people might naively say, “Well, look, we’ve had enough growth, let’s just stop now.” And so we’ll just try to freeze everything in place. But even that can’t be done, Marian, because even if we’re willing to settle for no economic growth, and I’m sure everyone alive today is very, very happy that our ancestors of two generations, three generations ago did not settle for the level of economic activity that existed then. You and I would not be talking in the way we’re talking, and the only web designers that exist would have eight legs. And so why should we think that we today have attained the ideal optimal level of economic prosperity? But anyway, even if we were all agreed, okay, we’re going to settle for this level of prosperity and no more, we still need to allow for economic change. Because if nothing else, things that are beyond human control change in the real world. Supplies of iron ore will dry up.
Donald Boudreaux: A calamitous weather event will destroy a factory somewhere. We always need people to be able to adjust to the facts on the ground, to figure out when something changes, all right, how to make it better. And that flexibility, that entrepreneurial alertness and creativity is, Schumpeter said, and he’s correct, it’s inseparable from capitalism. If you try to freeze our economy in its current pattern, you won’t freeze it in its current pattern. You’ll collapse it. It will eventually collapse. We have no choice other than to continue to move forward with growth by embracing creative destruction or to collapse back into a much, much more economically destitute state. Now, I’m talking in rather extremes here. Governments do a lot of really unwise things, and creative destruction can be slowed without stopping it. And I’m against that. But obstructing creative destruction doesn’t necessarily stop it. But if we manage to stop it, as some people want to do, then we will all pay a very severe price. It would be a true calamity of a sort that even the worst, even the most pessimistic environmental worry war could not possibly imagine.
Marian Tupy: Yeah, I think that’s fundamental. I think stagnation really equals destruction in the age of the world. Because there are, in Donald Rumsfeld’s famous words, unknown unknowns. There are going to be challenges that humanity is going to be facing, whether it’s going to come from space or from microorganisms. We want to be as rich and as technologically sophisticated as we possibly can to address those problems. Okay, on to the big one, the biggest one of them all, the granddaddy of them all, the Great Depression. Can you steelman the anti-market position about what happened in 1929? What went wrong?
Donald Boudreaux: Yes. In the 1920s, a fundamental contradiction of capitalism reached its peak. The rich got richer. The poor they may have gotten richer, but they didn’t get richer at the same rate. Rich people spend a smaller portion of their incomes than do poorer people. By the late 1920s, you had an increasingly unequal distribution of income. A smaller portion of that income was being spent because it was being grabbed by the rich. And so America’s factories were producing more than America’s factories could sell. And when America’s factories are producing more than America’s factories can sell, then a terrible spiral takes place. The factories start laying off workers. That further reduces the income of factory workers. People lower down on the income distribution. They reduce their spending. That further reduces the demand for economic output. That further reduces employment. All of this happened, unfortunately, I’m still steelmanning the argument, when Herbert Hoover was president and in office. And as everyone knows, Herbert Hoover was a staunch advocate of laissez-faire. He was a do-nothing president. The depression happened, and Herbert Hoover did nothing. He just basically sat in the White House and twiddled his thumbs, hoping this recession would go away.
Donald Boudreaux: They went away in the past. Why won’t they go away now? Then, of course, it got worse, 1932, 1933, those truly were the depths of the depression. Unemployment in America hit 25%. If you look at non-agricultural employment, it was well over 30%. In the cities and towns, it was one out of every three people, basically, was unemployed. Fortunately, but not unsurprisingly, the American people elected Franklin Roosevelt to office. Franklin Roosevelt, although not perfect, he came to office with a whole bunch of really good ideas and really well-meaning and smart advisors. They developed the New Deal. And the New Deal was a system of programs that some of them worked for relief, but many of them, the core programs, were for recovery. And it’s because of the New Deal that we were able to finally recover. Now, of course, we know that the entire decade of the 1930s was one of very high unemployment. There was never true recovery, but that’s only because the depths of the depression were so great. Finally, World War II comes along, more government spending, we get out of the depression, everything’s better again. That’s the myth.
Marian Tupy: And that’s what I suspect a lot of American kids will learn at school. I certainly remember growing up in Czechoslovakia under communism. Communists in Czechoslovakia, on the other side of the world, were making movies about overproduction of the capitalist system and how socialism was necessary because it knew how much to produce and how much not to produce, et cetera. But I suspect that you don’t quite agree with that particular interpretation of the Great Depression.
Donald Boudreaux: No, I don’t, but let me just give it one more attempt, a bit of verification. Paul Samuelson, the great American economist, who was born in 1915 and he died in 2009, a great Keynesian. He gave an interview not long before he died, just a few months before he died, and he was recollecting his younger years. In this interview, this was given in 2008 or 2009, Paul Samuelson said, he said, you know, when I was graduating from high school, which was 1932, Hoover’s last full year in office, he said, we’ve had all these years of do nothing. Nothing happened. So this is a belief held even by Nobel Prize-winning prominent economists. So, where to start with busting this fallacy? Let’s start with the easy one, Hoover. Hoover was not a do-nothing president. He was no advocate of laissez-faire. Hoover was the president who signed the Smoot-Hawley Tariff Act, by the way. Hoover created the Reconstruction Finance Corporation. Hoover spent, deficit spent, every year of his administration. In fact, one of the platforms of Franklin Roosevelt running in 1932 was that Hoover was too big a spender.
Donald Boudreaux: He left me, and I’ll be more fiscally responsible. I’ll reduce the deficit. Hoover raised tax rates. Hoover bragged about how much his administration did do to try to combat the depression. And it was the first time, really, that any sitting American president did that much to combat an economic downturn. Hoover was the furthest thing you could imagine when in office, an advocate of laissez-faire. So that’s a complete fallacy. In the 1920s, and this is from research done by Simon Kuznets, Nobel Prize-winning, very, very respectable empirical economist, Simon Kuznets found that during the 1920s, the distribution of income, in fact, did not grow more heavily toward upper-income Americans. In fact, it equaled out, it didn’t become equal, but it became a little bit flatter in the 1920s. In terms of spending, so this mythical theory says that there just wasn’t enough spending to buy what the factories were producing. You look at the data on consumer spending, the 1920s, it was off the charts. Consumers were spending lots of money. It was a great boom time for Americans. And so I’m just skimming the surface here about the causes of the Depression.
Donald Boudreaux: What I believe happened, and here I’m quite conventional, what I believe happened, Smoot-Hawley in 1930 certainly didn’t help things, but it’s not the cause of the Great Depression. It made it worse, but it’s not the cause. They’re not even the main culprit. The main culprit was bad monetary theory. The Fed was created in 1913 to serve as a lender of last resort. Before the Fed was created, you had private arrangements. Whenever banking crises would happen, they had private arrangements where bank clearing houses would get together and channel liquidity to those parts of the banking system that needed money. And these panics, as they were called, were pretty quickly undone. And after the panic of 1907, people said, well, we can’t have this. Let’s get government to take over this process.
Marian Tupy: What could go wrong?
Donald Boudreaux: What could go wrong? So they created the Federal Reserve. And it itself is the product of lots of compromise. You had 12 Federal Reserve regional banks that back then, had more independent power than they have now. But to make a long story, very long story, very short, given the existence of the Fed, which was supposed to serve as a lender of last resort, when the downturn began, it began in August of 1929, so it began two months before the stock market crash. The Fed should have stepped in to prevent the money supply from contracting. But because of the downturn, because of the unique structure of the American banking system, the money supply began to contract. The Fed was supposed to say, Okay, we’re going to prevent that. We’re not going to allow the money supply to contract. But the Fed just stood by and said, well, we’re going to let the money supply contract. And Milton Friedman and Anna Schwartz document this in great detail in their 1963 book. And they call it the Great Contraction. The money supply from 1929 to 1933 contracted by over 30%.
Donald Boudreaux: That is huge. You cannot have an effect of pulling out of an industrial economy of that amount of money without causing severe downturn. So that happened. Then on top of that, making things so that that accounts for the terrible, enormous downturn in the early 1930s. And then you have the hyperactive Hoover. Again, this is historically unique. This has never happened before, this level of economic intervention by the national government. And then it gets worse under FDR. And so I think the Friedman-Schwartz story of the Great Contraction very nicely explains the sudden and immense depth of the initial contraction in the early 1930s. I think the length of the Great Depression is explained by lots of subsidiary factors involved. But the big problem was what the economic historian Bob Higgs calls regime uncertainty. First Hoover and then especially Roosevelt, who became increasingly hostile to businesses and investors all throughout the 1930s. Basically, that scared investors off. Well, if you want recovery, you can’t scare investors off. You can’t threaten their property rights. You can’t threaten to tax away their earnings. You can’t threaten to control prices. And all of this was being done.
Donald Boudreaux: And so Bob Higgs gathers, I think, very persuasive evidence, and as you know, we report this in the book, that FDR and the New Dealers’ increasing hostility to free market capitalism and to investors caused investors to stay on the sidelines. And they stayed on the sidelines. Roosevelt got a little more friendly to business when he needed businesses to cooperate in the war effort, but there was still concern that after the war, Roosevelt would return to his increasingly anti-capitalist stance. But of course, Roosevelt dies in April of 1945. Harry Truman, for all of his imperfections, was certainly not the firebrand that FDR was. He himself was a businessman. He was perceived, quite rightly, as being much less radical than Roosevelt. Harry Truman had no New Deal. He had a square deal, as he called it, for America. And so Higgs dates the end of the Great Depression as immediately after the war, starting in 1946 or 1947. The war years, we can’t say anything about. The data don’t tell us anything. You’re conscripting people into a military. That doesn’t… Well, okay, unemployment looks low, but that’s clearly not a result of an improved market economy.
Donald Boudreaux: Prices are controlled. Wages are controlled. Certainly, the standard of living of ordinary Americans back home was falling during the war. Gasoline rationing, food rationing. So if you identify the end of the Depression as a return to high and rising living standards of ordinary people, you don’t get any real evidence of that, any evidence at all of that, until the years immediately following the end of World War II. You don’t get it in the 1930s. You certainly don’t get it during the war. And so the New Deal didn’t cure the Great Depression. If anything, it only extended the Great Depression throughout the 1930s. The war didn’t cure the Great Depression. It was, however, just or unjust you think that war might have been, it completely suppressed the market economy, very much suppressed the market economy. And so we can’t say… We must say that the Depression ended, if we’re going to actually rely on the data, after the end of World War II.
Marian Tupy: And it makes me wonder, as you were speaking, that perhaps one of the reasons why, especially conservatives, are so keen on the 1950s is precisely because the 1950s were such a great change from the 1940s and the 1930s. It wasn’t that 1950s were objectively the best time to be alive, looking from the 2025 vantage point. It’s just that, for once, the American economy actually functioned as it did prior to the Depression.
Donald Boudreaux: I think if you… And here I’m just going on my impression, no particular data, but I think data would back it up. I think if you look at the two decades in the 20th century where ordinary Americans enjoyed the single largest increase in their consumption ability, their ability to consume things, the first decade is the 1920s, the second decade is the 1950s. In part, that was because from the 1950s, we’re catching up after all this deprivation of World War II. The 1950s was an era of great economic growth. But the myth that conservatives and, by the way, lots of progressives have as well, about the 1950s is that somehow it stopped, that we reached a peak in the 1950s, and that things have been going downhill ever since. Or maybe we reached a peak a decade and a half later and been going downhill ever since, that we, in the early or now second quarter of the 21st century, look back wistfully and longfully at those wonderful decades that we must try to recover because they were so much better than our time now. That’s just ridiculous. The 1950s were very good compared to the 1930s and even the 1920s. The 1950s, if any of us today, Marian, were suddenly projected back to live even a week in the 1950s, would come screaming back to 1925, embracing it in all of its wonders.
Marian Tupy: So this obsession with America’s golden past, the 1950s being better in the views of some people than, say, for example, today, which leads us obviously to the current trade policy and President Trump and tariffs. But I just want to put a pin in the statement you made about regime uncertainty, because I think that’s also connected to today. The regime uncertainty, if you have $10,000 and you want to invest them somewhere in the 1930s, you might not want to do that, because you don’t know what tariffs are going to be tomorrow, what taxes are going to be tomorrow, what regulations are going to be tomorrow, right? And right now, we are sort of reliving something very similar. We have a great deal of regime uncertainty, especially in the trade area. And this is partly driven by the perception that American workers had a better time in the 1950s and 1970s, and that if you can just reverse this draconian neoliberal trade policy that we’ve all been suffering from since 1980 or certainly since 1990, then everything will be hunky-dory. You’ve been writing a lot about tariffs. Just very briefly, because I want to then turn to the Great Recession, what’s the biggest misconception that Americans believe about tariffs?
Donald Boudreaux: About tariffs, that tariffs can somehow restore an American economic golden age. And that itself, that belief, rests on an even more fundamental error, namely that America’s industrial economy in the past was somehow better or stronger or bigger than it is today. American industrial output today is at an all-time high. Real wages, even of the workers that the Bureau of Labor Statistics classifies as production and non-supervisory workers, real wages are at an all-time high. Living standards are at an all-time high. It is simply a mistake to say that we have deindustrialized. We haven’t deindustrialized. Now, let me say, it wouldn’t necessarily be horrible if we deindustrialized. There’s nothing particularly spectacular about producing industrial outputs, but as it happens, we produce still a lot of industrial outputs. What has happened is, and this has been happening, by the way, for over a century, what has happened is that an increasingly larger portion, both of GDP and of the workforce, works in services, comes from services. And so while absolute industrial output is at an all-time high, service output has grown even faster. And let’s face it, we want most of us to work in the service industry.
Donald Boudreaux: There’s nothing wrong with working in a manufacturing job. My father was a pipe fitter in a shipyard, and I very much respected what he did. But my father would have thought me crazy if I’d have dropped out of college to not pursue my service sector employment in order to work as a welder or pipe fitter in the same shipyard where he worked. Those manufacturing jobs were not wonderful in the past. They were hard. They didn’t pay as well as service sector jobs do today. And so this myth that we have lost something that we should try to regain is, well, just that. It’s a myth. What we’ve lost is something that no one would really want to regain, no American would really want to regain.
Marian Tupy: I think it is important to understand also that even people during the height of American manufacturing didn’t think that manufacturing jobs were all that great. If you think about Charlie Chaplin’s possibly one of his top two movies, one is The Dictator, which is incredible, but the other one is Modern Times. And what is Modern Times? It’s an attack on the monotony and the physical destructiveness, or rather the destructiveness of human physique by repetitive work in a factory.
Donald Boudreaux: Yeah. Let me tell a personal story. And again, look, I love my father. He was a very dear man, and he provided for his family. My dad dropped out of school in sixth grade, and he worked as a pipe fitter in a shipyard for most of his career. And I grew up in a little neighborhood in suburbs of New Orleans, and most of my friends, the friends in the neighborhood and the friends I went to school with, their fathers, the majority of them worked at that same shipyard near New Orleans. It was the biggest employer at the time in the state of Louisiana. I had several of my friends’ fathers who were missing at least one digit. Now, my father fortunately died with all 20 of his digits, but I can think of four or five of my neighborhood friends and school friends whose fathers were missing one or two fingers, ’cause that was dangerous work. You’re working in a shipyard and a steel plate falls in your hand. You lose your finger. It was dirty work. I worked in the shipyard during the summers when I was in college, and it was nothing about it that was attractive. I could not wait to get home. If anything, it gave me further incentive to stay in school. It’s dirty. It was miserable. It was monotonous. It was nothing about it that was attractive, and it didn’t pay all that well.
Marian Tupy: I’ve been very heartened by the fact that 80% of Americans say that they are opposed to higher tariffs. Do you think that is an outcome of American education? So we’ve been very critical of American education, and I think rightly so. In fact, we could be critical about education in Britain and many other countries. But perhaps the saving grace is that there are certain lessons that have been repeated in textbooks time and time again, such as the destructiveness of Smoot-Hawley, that American kids have picked up in school that sort of stayed with them. So that’s one alternative. The other alternative is that American people simply feel the impact of tariffs or fear the impact of tariffs and are justly freaked out by it. Do you have any memories about learning about Smoot-Hawley? Do you think that that has penetrated the American mind? Or is it more like, we can see the danger and we don’t want to go down that route?
Donald Boudreaux: I think I probably didn’t hear of Smoot-Hawley until I was in college. But I can’t say for sure. I don’t remember when I first heard about Smoot-Hawley. I think it’s a really good question, Marian, and I’m not sure I have a complete…
Marian Tupy: That’s fine.
Donald Boudreaux: But let me say this. When Smoot-Hawley was enacted, trade was a much smaller portion of the American economy. Trade, although nowhere near a majority of the American economy, it’s a much larger portion of the American economy today. Being a much larger portion of the American economy today, when you mess with trade, you’re going to have price effects and output effects that are more noticeable than when trade is a smaller portion of the American economy. And so I think that the growth of globalization is part of the reason why Americans seem to be more sensitive today to the ill effects of higher tariffs than they were in the past.
Marian Tupy: Of course, President Trump could reply, if we can artificially or by government fiat reduce the amount of the American economy which is exposed to trade, then we will not have to worry about these things in the future. But I suspect that you are going to tell me that there are a lot of American jobs which depend on exports and imports of cheap inputs.
Donald Boudreaux: Depend not only on exports, but a lot of American jobs depend on the thing that Trump mysteriously hates, trade deficits. Trade deficits, of course, another name for them is capital account surpluses. Trade deficits occur when foreigners want to invest more in America. And so when we trade and buy stuff from foreigners, foreigners use some of the dollars that they earn to buy American exports. That creates jobs in America. They take other parts of what they earn and they invest it in America. That too, creates jobs in America. You stop trading, those dollars don’t come back. And so America will still have jobs, but there’ll be jobs doing things that we don’t do as well as we do when we’re integrated into a larger world economy by trade.
Marian Tupy: I think that’s the key that a lot of people don’t understand is that when a foreign company ends up with a bunch of dollars, there really are only three things they can do with it. One is to dump the dollar, exchange it for a minbi, for example, which drives the price of dollar down, thereby helps our exports. They can buy our debt, which, of course, keeps us from having to raise taxes because we are addicted to spending, or they can invest it in the American economy. So whichever way you look at it, it’s to the benefit of the United States.
Donald Boudreaux: I would change one thing you said. I would say we are addicted to spending. That our government is addicted to spending. And when you’re dealing with your own money, some Americans, of course, are imprudent. But I don’t see any evidence that ordinary private Americans are, on the whole, improvident or imprudent. You look at the net, the real inflation-adjusted net wealth of both the average and even the median American household, it’s higher now. Both at an all-time high. They’re much higher than they were when China joined the WTO, or when America last ran a trade surplus, or when NAFTA was enacted in 1994. And so the fact that the real net worth of American households is rising.
Marian Tupy: Great correction, totally…
Donald Boudreaux: The government’s addicted to spending. And so even there, yeah, I’m grateful that foreigners are willing to help us bear the burden of this fiscally incontinent behemoth that we have in DC spending money that it doesn’t have.
Marian Tupy: Final topic, Great Recession. Theory versus reality. What went wrong?
Donald Boudreaux: So the theory, of course, is that we had all this deregulation leading up to the housing crisis, and that deregulation was combined with greedy, mustache-twisting bankers who lent money to people that they knew couldn’t repay the mortgage loans. Well, even if… Anybody with any kind of common sense would know no one who has money to lend wants to lend the money to someone who they think won’t repay it. This is just not a good banking strategy. What in fact happened… This is a complicated story, and it’s too bad Phil Gramm isn’t here ’cause he knows more… He’s more of a master of the details than I am. But basically, what happened is starting in the early 1990s and really picking up in the latter part of the 1990s, the government became intent on increasing the rate of home ownership. Well, how do you do that? You make it easier for people to get home mortgages. Well, why didn’t more people have home mortgages than had home mortgages in, say, the mid-1990s? Well, it’s because not more people met the credit standards that were traditional in extending mortgage loans.
Donald Boudreaux: So the government basically says, this is unacceptable. We want banks to extend more mortgage lending to people that they otherwise wouldn’t extend mortgage lending to. Well, how do you get banks to do this? Banks, in fact, don’t want to lend money to people who are in excessively high risk. So the government basically says, I’m simplifying a lot, but even though Fannie and Freddie Mac were nominally private, they were pretty much under the control of the federal government. The federal government said, Look, you have to buy, you, Fannie and Freddie, you have to buy increasingly large shares of your portfolio have to be of subprime mortgages. Otherwise, we’re going to do all kinds of nasty things to you. So the government’s pressuring Fannie and Freddie to hold increasingly large share of subprime mortgages. So Fannie and Freddie are going to guarantee these mortgages. Well, you’re a bank in Omaha, Nebraska, or in Culpeper, Virginia, and someone comes to you to borrow money to buy a house. In the past, you’d say, Sorry, you don’t have 20% to put down, and you don’t have good enough documented income. I’m not going to lend you the money.
Donald Boudreaux: But now, Freddie comes by and says, Look, I really want to buy some subprime loans from you. And so if you make some subprime loans, I’ll buy them from you. I’ll relieve you of the risk. So now that same borrower comes back and says, Oh, I have good news for you. I’ll lend you the money now. Oh, great. So you lend the money to this borrower who doesn’t quite meet the credit standards. You sell the mortgage to a government-backed firm. And so you, as the banker, you’re off the hook. But that bad loan is still out there. And so a lot of these people, increasingly large numbers of the house mortgages were held by people who couldn’t afford to repay. And so if there’s any kind of decline in economic activity, certainly any kind of decline in housing prices, then that’s going to put a lot of the homeowners under water. Well, the ones who were the responsible borrowers, they really had no trouble repaying. But the subprime borrowers did. And you have a great deal of credit built upon these subprime mortgage loans. When they start to collapse, the house of cards, the figurative house of cards, collapses. And you have the subprime crisis. And then the government bails out some firms.
Marian Tupy: One final question. Why don’t bad ideas die?
Donald Boudreaux: Two reasons, or at least two reasons. One, you show me a bad economic idea, and I will show you a special interest group who benefits from the prevalence of that bad economic idea. There are special interest group producers who benefit from people really believing that tariffs are good for the country. Genuinely, sincerely believing that. And so when you have, this is what Bruce Yandle called the Bootleggers and Baptists idea, when you have a sincere but mistaken belief backed by venal interest groups who stand to gain materially by the maintenance of those beliefs, those beliefs become pretty entrenched, and they are hard to extract from the general populace. The second reason is because bad ideas are simply easier to grasp than good ideas in most cases. It’s not that good ideas are difficult to grasp, but they usually have to… They usually involve one or two steps of reasoning beyond the bad idea. And so to push out bad ideas and replace them with good ideas requires good economic education, good education, the kind of thing you’re doing, the podcast, the things that you write.
Donald Boudreaux: So all the effort that people, Marian, who we know who are in our circles, the things that we’re doing, all the blogging and podcasting and tweeting, it’s a struggle to present good ideas alongside those of bad ideas. But we have no choice. We have to keep doing it. And history shows that you can, if you’re effective at it, you can have some success at pushing bad ideas aside and replacing them with good ideas. But it’s a never-ending battle. It’s not a one-time thing. It’s not like the bad idea is defeated and then it goes away forever. It’ll always lurk. So we always have to be at the ready to challenge it with the good ideas. And we have to be very patient in doing it.
Marian Tupy: And it will keep us employed for a long time…
Donald Boudreaux: It will.
Marian Tupy: And it will be interesting for time to come. Don, thank you so much for your time. This has been great. Once again, the book is, “The Triumph of Economic Freedom, Debunking the Seven Great Myths of American Capitalism,” by Senator Phil Gramm and Don Boudreaux. We skimmed over one of Don’s great contributions in the last few months, certainly since Liberation Day. He’s been blogging and writing furiously about the tariffs. We touched upon it, but we didn’t go into details. I urge all of our listeners and all the people who view this podcast to follow Don’s writings on his blog, Cafe Hayek. And we will, of course, post this podcast along with book recommendations and the appropriate links. Thank you very much.
Donald Boudreaux: Thank you.