not seem interested in our simple (too simple, in their opinion) yet powerful exposition of changing unemployment patterns over a large sweep of contemporary history. We presented the paper to various university audiences, at the Duke-North Carolina-NC State Research Triangle Economic History Workshop, Indiana University, the University of Chicago, and the University of Illinois, among others. The research was furthered by stints by both authors on the staff of the Joint Economic Committee of Congress, where, with the support of Bruce Bartlett and the late Charles Bradford (and indirectly Congressman Clarence Brown and Senator Roger Jepsen) we published (in late 1982) a paper on the “Natural Rate of Unemployment” that incorporated our unemployment model.
In 1983, while spending a delightful and highly productive summer in Palo Alto sponsored by the Institute for Humane Studies and funded by the Liberty Fund, we shared our findings with Murray Rothbard, who encouraged us to write a long paper for the inaugural issue of the Review of Austrian Economics (1987). That formed the nucleus of this book. Another paper (which is the basis for chapter 6), given in 1984 to what is now the Cliometrics Society, furthered our enthusiasm for the project; Donald McCloskey, then editing the Journal of Economic History, was particularly enthusiastic and supportive.
We then wrote a preliminary version of this work, but the pressure of other projects together with other difficulties delayed its publication. In the past year, however, we have returned to the project. The wage framework that is the centerpiece of this volume was used in writing a paper on the post-World War II transition to peace, which Murray Rothbard and Walter Block agreed to publish in the Review of Austrian Economics; Robert Higgs of Seattle University liked that paper, spurring us on further. We began in earnest a thorough revision of our earlier effort. David Theroux, president of the Independent Institute, helped enormously by offering to publish the manuscript.
As Roger Garrison of Auburn University pointed out in an extremely detailed and useful review of the manuscript, this book might be perceived as old-fashioned in many ways. Some will certainly say it is not on the cutting edge of modern economic theory: that the basic theory was espoused decades ago by Austrian economists such as Ludwig von Mises and English classical-neoclassical economists such as A. C. Pigou. For every 1990-era reference on efficiency wages, hysteresis, or real business cycles, there are probably two or three references to what most contemporary economists would consider obscure older works by such unknowns (to them) as W. H. Hutt, Benjamin Anderson, Murray Rothbard, Willford King, or Edwin Cannan.
The statistical analysis primarily uses ordinary least squares regression techniques, which modern econometricians regard as hopelessly primitive. There is no computable general equilibrium (CGE) model here, nor will one find Kalman filters or other such econometric nuances. Yet for other readers, including noneconomists and Austrian economists, there is probably a bit too much empirical emphasis and statistical testing. This is a distinctly low-tech manuscript that may well be scorned both by the devotees of high-tech empiricism, and by the philosophes and praxeologists who prefer a no-tech methodology. Yet we use the approach because it powerfully explains the way the world works in twentieth-century America and is relatively simple to understand, a quality that a majority of economists view with disdain but most Americans still applaud. Further, we feel that, properly interpreted, the arguments presented here are distinctly mainstream in nature and, in fact, represent a pushing back of the frontiers of economic knowledge by providing a broad-based explanation of how business cycles are generated in the United States.
We are indebted to a bevy of persons, including all those cited above. Several students, most recently Emily Stroud and Sam Chamberlin of Ohio University’s Economics Department and David Broscious of its Contemporary History Institute, helped provide historical documentation. Judith Daso’s staff in the government documents room of the Vernon Alden Library at Ohio University was always helpful; we were also assisted by staff at the Stanford University Library and the Library of Congress. John Gaddis has striven to provide a congenial working environment in the Contemporary History Institute. A variety of colleagues and graduate students have offered insight and suggestions over the years. At Ohio University, we have benefited from the comments of three Economics Department colleagues, David Klingaman, Douglas Adie, and the late John Peterson. Equally useful has been our Contemporary History Institute colleague (and distinguished Truman-era historian) Alonzo Hamby. Gene Smiley of Marquette University and Richard Timberlake of the University of Georgia have made insightful suggestions, as have Charles Baird of California State University at Hayward and Terry Anderson of Montana State University.
Other encouragement has come from Fred Glahe of the University of Colorado, Lawrence Kudlow of Bear Stearns, Joint Economic Committee economist Chris Frenze, and Steve Hanke of Johns Hopkins University.
Becky Huff and Angie Cook of the Economics Department at Ohio University provided invaluable secretarial help, as did Hallie Willard of the Contemporary History Institute. The Earhart Foundation indirectly helped with some needed financial assistance. Last, but never least, the project would never have reached fruition without the support of our wives, Karen Vedder and Gladys Gallaway.
We conclude this introduction on a sad note. The person who did the most to publicize our views on the labor market to a broader audience was the late Warren Brookes. Warren was a businessman who turned to journalism in midlife, writing an extraordinarily perceptive column dealing primarily with economic matters. He did as much to further the “supply-side” revolution in the late 1970s and early 1980s as any other person, and more recently he uncovered evidence that devastatingly exposed the true economic costs of new environmental laws and regulations. His untimely death has robbed the world of a great journalist, a superb economist, and, personally, a wonderful friend. We dedicate this book to Warren’s memory.
RICHARD K. VEDDER
LOWELL E. GALLAWAY
1
The Unemployment Century
Of the five centuries during which the United States has been settled by Europeans, in only one, the twentieth century, has unemployment been a dominant political and economic issue. Whereas in nineteenth-century America passions erupted over inflation and deflation, tariffs and taxes, slavery, the disposition of public lands, central banking, and the regulation of monopolies, public debate about the “unemployment problem” was sporadic and localized. Indeed, the word “unemployment” did not even exist during most of the century, and when Alfred Marshall wrote the definitive nineteenth-century treatise on economics in 1890, he mentioned the word on but one page.1
By contrast, unemployment became the dominant economic issue of the twentieth century both within the academy and in the realm of public policy. During the 1890’s, there were but two articles dealing with the issue in serious journals of economics and statistics; by the 1930s, scores of papers were published discussing the measurement, determinants, and effects of unemployment.2 While in the last presidential election of the nineteenth century, that of 1896, the central economic issue was monetary policy and the gold standard, by 1932 unemployment had moved center stage.
Rising public concern over unemployment led to political pressure to “do something” about the unemployment problem. Even in the first decade of the new century, the unemployment arising out of the panic of 1907 led to cries to eliminate the root cause of financial instability. This, in turn, ultimately led to the Federal Reserve Act, the first major federal involvement in macroeconomic intervention. A few years later, during the 1920–22 economic downturn, a presidential commission on unemployment was created.
In the 1930s, a revolutionary activist approach to the unemployment problem was implemented as part of the New Deal. No longer was the government simply content to try to eliminate monetary instability or study the causes of unemployment. New legislation involved the government in labor markets in important new ways. Even before the New Deal, the Davis-Bacon Act got the federal government into the
