Was the Great Depression the Fault of Government and Unions? An Institutional/Keynesian Analysis

Abstract

A growing number of economists blame the length and severity of the Great Depression on factors that rigidified wage rates, raised production costs, and interfered with flexible allocation of labor. The centerpiece of this critique is President Roosevelt‘s New Deal labor program, portrayed as creating a series of large negative supply shocks through encouragement of unions, minimum wages, unemployment insurance, and other anti-competitive industrial relations practices. This paper presents the other side of the story using a combination of institutional and Keynesian theory, drawn principally from the work of J.R. Commons and J.M. Keynes. Both - spending and - industrial relations' rationales for stable wages are developed; also developed is the positive economic case for the New Deal labor program. Attention is called to the long-neglected macroeconomic dimension of industrial relations.