Wage Stagnation, The Depression, and Us

I can tell I’m only going to scratch the surface of these topics, so let me begin with the caveat that I’m just thinking through some ideas in this post.  I don’t actually propose to know something.

After reading Thomas Geoghegan’s essay Infinite Debt in Harper’s about how capital shifted from manufacturing into the financial sector and knowledge workers have nothing tangible to withhold and with which to demand higher wages, I began to wonder what happened in the 20’s leading up to The Great Depression.  Working for an internet startup, living in an era of bits vs. matter, and watching American car companies go bankrupt while I harbor a sense of “shouldn’t we buy subway passes instead of cars anyway?” I began to wonder if capital investments in manufacturing would be the answer now or were ever.

It wasn’t hard (to be honest I just looked at Wikipedia) to find a credible and widely respected theory (“popularized by Waddill Catchings and William Trufant Foster“) that blames The Great Depression on Calvin Coolidge’s low discount rate and a subsequent over-investment in manufacturing.  The titans of industry poured capital into building bigger and better factories that produced more and more stuff.  Profits went to the pockets of shareholders and to more machinery that produced more stuff. Profits did not go to wage increases, so, eventually, there were no consumers to buy the stuff.  With a drop in consumption came a drop of profits and capital investments and empty shareholder pockets and a crash of the stock market.

So, investing everything in manufacturing didn’t work and investing everything in the financial sector didn’t work.

Geoghegan also points to a breakdown of unions without which the worker could not demand the wage increases that might have kept the economy growing. There’s no doubt that steady wage increases are necessary within an economy that counts inflation as a staple. However, anyone who’s paying attention to the collapse of newspapers would find it hard to believe that unions can preserve wage increases in a time of mis-invested capital. (See The Boston Newspaper Guild’s battle with NYTimes Co. for evidence of unions being forced to make concessions no matter how strong they are.)

It seems to me that throwing all of our money at the sure bet, be it the booming factories of the early 20th Century or the booming banks of the early 21st Century, is not a sure bet at all.  In fact, it’s a pathway to failure. Perhaps it’s a fault of human nature bearing out in the market. People are followers.  They see The Joneses making money working at an investment bank, so they go do that. If you don’t see anyone making money as a innovator, you’re unlikely to believe that you could.  And so, instead of a world of people betting on innovation (with investments and career choice)–which, by definition, is merely the possibility of making money–we have a world of people following the trends. (And at the heart of it, isn’t that what makes you money in the stock market?  As more people want a stock, it increases in value. So, knowing what will be popular is what makes money in stocks–not knowing what will solve problems.)

I’m not quite sure what it would look like to have the majority of the population trying to innovate (maybe it would look like YouTube?).  We’d have more duds than stars, but we’d have more stars than we have now.  In any case, it seems like it’s worth a try.  Maybe the ‘cyclical nature’ of our economy has something to do with a lot of followers all trying to make money off of the same thing instead of building the next thing.

(At this point, I can’t help but think about Clay Shirky’s speech about the internet unleashing the builders, creators, and innovators of our society as people do more interacting than tv watching: Gin, Television, and Social Surplus.)

But, as I said,  I don’t know anything about this stuff. So, I’d love to hear from someone who does in the comments.

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~ by jaredran on May 5, 2009.

2 Responses to “Wage Stagnation, The Depression, and Us”

  1. Jared,

    +1 on the ‘let there be more innovators’ thought, I think we’d just see a lot more people take risks and build interesting things – we may be worse off in terms of actual wealth creation since a lot of these ideas will fail, but better off in terms of value creation.

    In my opinion it boils down to how much risk a person is willing to take. Heading to Wall St and following the trend was the lowest-risk and easiest way of making money since you were more or less guaranteed a large reward if you worked your ass off and managed to not burn out.

    Thankfully we now have a president who gets it, http://www.nytimes.com/2009/05/03/magazine/03Obama-t.html?_r=1&sq=david%20leonhardt&st=cse&scp=2&pagewanted=all

    Also, check out paul graham’s essays (if you don’t mind the occassional kool-aid): http://paulgraham.com/highres.html and http://paulgraham.com/articles.html

  2. Aditya,

    I could’ve been more clear in my post that I don’t think pouring all of our money into innovation is the answer either. My broader point was that pouring all of our money into one aspect of the economy clearly doesn’t work. Diversification is likely much healthier, but I’d love to see that diversification start with encouragement (both financial and moral encouragement) towards innovation.

    Does that make any sense?

    Thanks for those links. I’m looking forward to checking them out.

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