Sweezy, Paul M., Monthly Review
I was introduced to economics in the late 1920s. I took Ec A in my sophomore year, 1928-1929, and Taussig's advanced theory course (Ec 7 I think it was called) in the following year. What we learned was basically Marshallian theory with a little Austrian capital theory mixed in.
Money and Banking was a separate subject that took off from the quantity theory of money and dealt with such topics as inflation and the business cycle, both assumed to be monetary phenomena superimposed on an underlying system of production of goods and services to meet human needs. It was taken for granted in those days that in some ultimate sense this was the purpose of the economic system, even though economists ever since Adam Smith had counted it a cardinal virtue of the system that meeting needs was an unintended by-product of individuals' concentrating on their own private interests.
An economics education of the kind we got at Harvard--certainly one of the best available at that time--was soon shown to fall remarkably short of preparing us to understand what was going to happen a few years later. I am not referring to the crash of 1929 or the subsequent depression. Both were on the spectacular side, but neither was unexpected or unprecedented. The business cycle had been with us for about a hundred years at that time, and the prosperity of the 1920s was obviously not going to last forever. The severity of the crash and the subsequent collapse were a surprise, but it was not too difficult to give plausible explanations. It was a sharp cyclical downturn, no more. This was the way most observers, including economists, diagnosed the situation in the early 1930s. Moreover, this diagnosis seemed to be compatible with what happened next. The bottom of the depression was reached in 1933, after which a recovery began and continued for several years. Unemployment had risen to 25 percent of the labor force in 1933, so it was obvious that there was a long way to go before the economy would really be back to what was considered a normal condition of relatively full employment. But no one thought in terms of that process being cut short in mid-term. And yet that is precisely what happened. In the middle of 1937, with unemployment still above 14 percent of the labor force, the economy suddenly went into a totally unexpected tailspin. Nothing in their training or past experience had prepared economists of that period for such a development.
I was definitely in this category. I was an instructor and tutor at that time, and in the summer of 1937 I was doing consulting work for a New Deal agency, the National Resources Planning Board. I remember very well the shock caused especially in Washington by what can perhaps best be called a recession within the depression. No one had expected it, and no one had a plausible explanation. The prevailing bewilderment was poignantly expressed by Secretary of the Treasury Henry Morgenthau in a meeting with his staff in November called to discuss a speech he was scheduled to give to the Academy of Social Science: "I need to know what I'm talking about, and where I'm going. Now if they ask me today, I don't know--I don't know what the President's done. He doesn't know because nobody's ever laid this out for him.... One of the real reasons that people in this country are so frightened is that they don't know. They don't know where we're going." (Quoted in Dean L. May, From New Deal to New Economics: The Liberal Response to the Recession of 1937 [New York and London, Garland Publishing, 1981], p. 15.)
You may be surprised to hear that as late as 1937 economists, in and out of government, were so baffled by an economic collapse that came in the middle of what they took to be an unfulfilled recovery. Hadn't Keynes's book, The General Theory of Employment and Money, published a year earlier, prepared us for the idea of an economy stalled out at less than full employment? And if so, why the all-but-universal shock when the ideal turned into reality? …