Thinking Through the Savage Machinery:
Peter Temin and Economic Crises


Peter Temin, Cambridge, MA, 2013                                                                   Photo: Matt Thoman

Peter Temin is trying to be optimistic. His most recent book, The Leaderless Economy, co-authored with David Vines, is a call for international cooperation that opens with a warm dedication to the future.

For our children and grandchildren in the hope that they will soon see a return to prosperity.[1]

“That was David’s suggestion,” Temin says with a chuckle when I bring it up. “He is the more optimistic between us.”

Temin’s pessimism is rooted in a belief that the international economy is reliving the 1930s, with the political situation in the United States in some ways akin to that of the Weimar period in Germany. “I don’t think the outcomes will be as extreme,” Temin says. “But the similarities are there.”

Added to this is the lack of—and state of—macroeconomic thinking. Temin and Vines write that macroeconomics “is the study of a subject in which everything depends on everything else,” and that “good macroeconomics requires understanding which bit of everything influences which other bits of everything else in the most important way.” But they also note that many of the issues faced by the world economic system “come from an inability of economists—and more importantly, an inability of policymakers and politicians—to think in this manner.”[2]

And, as he told me more generally in February of 2011, Temin believes that “macroeconomics has lost its way,”and is thus less able to forge any kind of coherent, broadly accepted plan for an escape from present conditions.

As Temin is an economic historian, it’s worthwhile—before looking at the present through his eyes—to go back to some of his earlier work. His first book, The Jacksonian Economy (1969), examined one of the more momentous economic crises in American history. The Panic of 1837, and the destructive deflation that followed, were long held to have been the fault of populist President Andrew Jackson, who in 1832 acted to kill the Second Bank of the United States and in 1836 issued an executive order that sought to curtail a land boom fueled by fevered speculation.

In what was the standard telling, Jackson vetoes the second charter of the Bank of the United States and moves federal deposits into state banks. This results in a large credit expansion (as the federal funds are regarded as new reserves allowing state banks to issue additional notes and credit) that fuels a speculative bubble, most notably in land. Seeking to arrest the land boom, Jackson’s executive order (the Specie Circular) requires that public lands be paid for with gold or silver (specie) rather than bank notes, and this moves gold and silver away from commerce centers and into the less-populated hinterlands where land speculation and sales are most robust. In the same year, Congress authorizes the distribution of a Treasury surplus to states in proportion to their populations—but the states in which the funds are to be distributed are often not the same states in which adequate reserves of gold and silver are held (because they’ve been moved away from population centers). The result, in the words of Bray Hammond, whom Temin quotes, is “absurd disorder” as specie travels willy-nilly around the country in the midst of a reckless credit expansion.[3]

Of this standard telling, Temin writes, “Despite its universal acceptance, this story will not stand close scrutiny; it is negated by the extant data of the 1830’s.” (There are many passages in Temin’s work which, like this more moderate early example, reward the layman’s patience with graphs and time series by boiling down the point he is making into a formulation that combines a certain scrappy combativeness with the specialist’s confident lacing of the specific quiver necessary to lance the heel of an opponent’s argument. It is characteristic of Temin’s method and style that a story with “universal acceptance” should be undone by “the extant data of the 1830’s.”)

According to Temin, banks did not recklessly expand credit as a result of the deposit of federal funds. Specie reserves actually increased in the 1830s. To understand what happened, then, it is necessary to look elsewhere—namely, at a complex international situation in which the United States was enmeshed.

The story, in brief, involved England, Mexico, and China. An agriculture-based economic boom began in the United Kingdom in 1832, and it led to increased British investment in the United States. The most notable effect of this increased investment was a rise in U.S. cotton prices. The Chinese, meanwhile, were increasing their consumption of opium (at the very strong urging of the British). Instead of accepting payments for goods shipped from China to the U.S. in silver (which would immediately be sent to England to pay for Indian opium), the Chinese began accepting American credit and transferring it to the English (who used it to consume American goods). This caused a buildup of specie in the United States because silver, which had previously flowed in from Mexico (in payment for U.S. goods) and then out to China (in payment for Chinese goods), remained in the United States.

The additional silver in U.S. banks allowed credit and the money supply to expand (banks could issue more notes on the basis of their inceased reserves of specie), thus contributing to general inflation. Meanwhile, British consumption of U.S. cotton specifically contributed to its ever-rising price. Increasing cotton prices helped fuel the speculation in land, and cotton was more frequently used as collateral for debts.

In early 1837, the price of cotton fell, and “the credit structure built with cotton as security collapsed.” The land boom went bust and a deflation began. There was a short recovery, but in 1839 things soured once more as the Bank of England tightened credit and a plentiful cotton harvest in the U.S. caused its price to drop again. A prolonged and disruptive deflation was the result.

Writing in 1969, with Keynesianism still dominant but with classical economics about to make a comeback, Temin includes this incidental note among his final passages:

[T]he economy possessed a structure of some analytic interest. It functioned to a large extent in the fashion described by what we now call classical economic theory. Prices were flexible, they could vary to facilitate capital transfers, and they could change radically without destroying the capacity of the economy to operate near capacity. Yet the price-specie-flow mechanism did not operate according to textbook rules… . And the price level, while variable, was not “neutral.” It mattered what the price level was, or at least what the price of cotton was, because a large part of the antebellum financial system used cotton for security. When its price fell, the system broke down, and a decline in prices was considerably more difficult to effect than a rise.[4]

Temin was born to liberal parents in Philadelphia in 1937, eight years into the Great Depression, four years after Roosevelt took office, four years before the U.S. would enter World War II, and seven years before the Bretton Woods Conference would create the basis for the postwar economic order. “I grew up during the Golden Age of economic growth,” he told me, “where the New Deal dominated the domestic scene.”

“I absorbed the idea that progress was thinking about everyone—poor, black, immigrant. You thought of bringing everybody up together, and of expanding everyone’s representation. That was the spirit of the New Deal, and then of the civil rights struggle after that.”

Temin’s father, Henry, was an attorney at a small law firm, and his mother, Annette, was an education activist who founded the Citizens Committee on Public Education in Philadelphia and created Language Arts Reading Camps for young children. “In some of the poorer schools,” Temin told me, “the children who learned to read in first grade would forget how to do it over the summer and so they’d have to be taught again in second grade.” The camps were designed to maintain the gains students had made in the first grade. (In their 1992 obituary of Annette Temin, the Philadelphia Inquirer wrote, “From the 1950s until well into the 1970s, Mrs. Temin fought for better schools in just about any way she could. She worked with school groups, she formed new ones, she attended meetings, she wrote letters. And she was effective.”[5])

It’s clear that his mother’s emphasis on education has been carried forward. When I visited with him in March and asked about where government stimulus spending might go—playing devil’s advocate, I asked if perhaps we’d run out of “shovel-ready” projects—Temin did not hesitate to tell me that in addition to building new infrastructure for “the next storm” (Superstorm Sandy had hit five months earlier), “education was the obvious place.” That same month he’d published an article on AlterNet naming state universities as “hidden victims of austerity,” pointing to a recent column by Thomas Friedman wherein Friedman enumerated three pressing challenges facing America (climate change, debt, and jobs in the context of technical change) but failed to mention education as characteristic of its fallen place in American society.

The United States…is on a path that will lead it far from economic leadership in years to come. The 20th century was the American century largely because educated Americans poured forth innovations and new ways of thinking that spread throughout the world. As American education continues its slow slide downward, only a smaller pool of innovators will get enough education to continue this process. Other countries that support education—most notably China—will become the centers of innovation and progress.[6]

Temin very much believes in government spending’s ability to improve our lives. On the day of our meeting in March, for example, I was in frequent contact with him as my train from New York to Boston was running late. Just over the Connecticut border a conductor told me that because Metro North sometimes took punitive action when Amtrak arrived on its territory behind schedule, we might be delayed further. When I finally arrived at Temin’s MIT office (not as late as I’d feared), he noted with genuine feeling what a shame it was that the government didn’t invest more in maintaining and improving its rail system. This is one of the ways in which Temin unapologetically bears the mark of the New Deal and the Keynesian consensus. I, born just after both had been eclipsed, agree with Temin on rail investments but have been conditioned by years of public policy choices and the incessant trumpeting of the ideologies of privatization to feel that even bringing myself to articulate the shame of this country’s failure to invest in something as useful as rail travel is fruitless because the notion that it might ever improve seems so far-fetched. An impression that was only reinforced during a subsequent, unrelated delay in Penn Station when a fellow passenger, who was riding out the wait by downing a drink in a T.G.I. Friday’s, said bitterly, “Well, Amtrak is a government monopoly, so they can do whatever they want.” This the more familiar attitude towards a service that simultaneously would not exist without public monies and suffers from a dearth of adequate government spending in part because it is the “wrong kind” of public investment.

Coming of age in a period where one of the worst economic crises in history had only been recently tamed, and was still very much in the public mind, it is understandable how an interest in economic disruptions like the one examined in The Jacksonian Economy might have developed in Temin. “I was very attracted to economic crises,” he told me. “I don’t think I ever consciously said, ‘there’s a reason why I do this.’ But looking back on it, I was interested in seeing the economic system under stress.”

But beyond that, it seems no coincidence that Temin should have begun with a study that used a simple model of money supply determinants created by Milton Friedman and Anna Schwartz to undermine the common understanding of a historical event, along the way demonstrating how the functioning of an economy whose contours were largely consistent with the sort of classical economic theory evangelized by the likes of Milton Friedman could result in disaster—even when operating in an era to which that theory was better suited. And indeed, not too long after the publication of The Jacksonian Economy in 1969, it was precisely the sort of classical economics personified by Friedman that became the conventional wisdom within the field of economics—with far reaching consequences outside of it.

Paul Krugman has written, “A number of economists played important roles in the great revival of classical economics between 1950 and 2000, but none was as influential as Milton Friedman.”

In 1963, Friedman and Schwartz published A Monetary History of the United States. The significance of this book from a public policy standpoint was that it made a case for a focus on monetary, rather than fiscal, policy. As Krugman writes of the distinction between the two:

Monetary policy is a highly technocratic, mostly apolitical form of government intervention in the economy. If the Fed decides to increase the money supply, all it does is purchase some government bonds from private banks, paying for the bonds by crediting the banks’ reserve accounts—in effect, all the Fed has to do is print some more monetary base. By contrast, fiscal policy involves the government much more deeply in the economy, often in a value-laden way: if politicians decide to use public works to promote employment, they need to decide what to build and where. Economists with a free-market bent, then, tend to want to believe that monetary policy is all that’s needed; those with a desire to see a more active government tend to believe that fiscal policy is essential.

As Krugman further notes, the “most influential and controversial discussion” in A Monetary History of the United States “concerned the Great Depression,” with Friedman and Schwartz arguing that the “fall in the money supply turned what might have been an ordinary recession into a catastrophic depression.” Friedman and Schwartz laid the blame for this fall in money supply at the feet of (who else?) the Federal Reserve—not for causing the drop in the money supply, but for failing to rescue foundering banks with loans, and thus allowing the fall in the money supply to happen. (Krugman points out that this distinction gets lost later in Friedman’s career, and he allows his argument to be popularly understood to mean that the Federal Reserve caused the Great Depression.)[7]

Temin took on Friedman and Schwartz in his 1976 book, Did Monetary Forces Cause the Great Depression? Positing two explanations for the Great Depression—the “money hypothesis” associated with Friedman and Schwartz (the reduction in money supply caused by widespread bank failures caused the collapse) and the “spending hypothesis” (a fall in aggregate spending caused the collapse)—he tests both and finds that “the spending hypothesis fits the observed data better than the money hypothesis.” The book closes with a line that is partially an expression of modesty (Temin would later write in Lessons From the Great Depression that one of the lasting lessons of the certainty displayed by the gold-standard champions of the 1930s was “[w]e should…be a bit humble in our approach to macroeconomic policy.”[8]), and partially a jab at the emerging macroeconomic orthodoxy being championed by Friedman: “the economist who uses this conclusion or any other conclusion about the Depression as a basis for economic policy recommendations essentially is performing an act of faith.”[9] This, in 1976, just as Keynesianism had been supplanted by a return to classical economics, and just as an experiment with monetarism as a primary tool of public policy was about to get underway.[10] That is, just as both public policy and economics were taking a leap of faith.

Throughout Did Monetary Forces Cause the Great Depression?, Temin characteristically combines a cautious, exacting attention to data and detail with pugilistic flourishes. For example, writing of how Friedman and Schwartz determine the relationship between income and the stock of money, Temin writes:

Friedman and Schwartz noted in the article published contemporaneously with the Monetary History that there was a strong historical correlation between changes in the level of income and changes in the size of the stock of money. They then said there were three possibilities explanations of this correlation. It could have been a coincidence, changes in the level of income could have determined changes in the stock on money, or changes in the stock of money could have determined changes in the level of income. The first possibility was rejected out of hand. And the second was rejected because the third could be accepted.[11]

Writing of econometric models and their lack of real utility in identifying factors precipitating the Great Depression (and, by implication, their limitations more generally), Temin says, “[t]hey should…be seen as analogues of Friedman and Schwartz’s history. Instead of testing their hypothesis, they state it and show that it is consistent with some selection of the data.”[12]

Of Friedman and Schwartz’s claim that the Bank of United States—a private bank (not to be confused with the Bank of the United States destroyed by Jackson nearly a century earlier) which failed in 1930, alone accounting for nearly twenty percent of the deposits in that year’s failed banks—had only temporary liquidity problems and could have been saved, Temin writes seven paragraphs on the history and corrupt and incompetent development and management of this wholly insolvent bank to which Friedman and Schwartz give special place in their analysis, and then concludes with an eighth in which he writes:

Friedman and Schwartz offered as confirmation of the Bank of United States’s essential soundness the observation that the Bank of United States paid out 83.5 per cent of its liabilities at the time of its closing, four-fifths of it within two years. Phrased differently, the Bank of United States paid only about $.60 on each dollar of deposits within two years of its closing. Over one-fifth of this was composed of offsets, that is, simultaneous cancellations of loans and deposits. This is not compelling evidence of underlying solvency.[13]

The animating spirit behind Did Monetary Forces Cause the Great Depression?, and the argument he convincingly marshals against Friedman and Schwartz, appears to derive from an admonition Temin formulates in The Jacksonian Economy:  “[P]lausibility is not accuracy.”[14]

Temin’s story of what caused the Great Depression is more fully described in Lessons from the Great Depression, but before considering that volume, it’s worthwhile pausing here to address two issues of particular note in postwar economics: elaborate models and the move away from Keynesianism.

Economics is replete with models that grow ever more complex and abstruse, placing it at an ever-greater remove from the layman, with whose life it is ostensibly concerned and upon whose life it has such impact. As James Kwak told this magazine back in 2010, “There has been this trend in the past thirty years which you might call ‘intimidation by math.’”

The proliferation of complex models has accompanied the shift away from the postwar Keynesian consensus. The Keynesian revolution was notable for being a marked departure from classical economics at a time when the sustainability of capitalism was itself in question. Keynes’ task was to make capitalism workable—to free it from the disruption wrought by its laissez-faire, unfettered, classically governed variety. Simultaneously, Keynes was adapting economics to a world that was more urbanized, and less agricultural. The economic disruptions of the 1970s pointed up problems in the Keynesian model as unemployment and inflation rose simultaneously—a phenomenon that, as Krugman points out, was correctly presaged by Milton Friedman and Edmund Phelps.[15] But rather than seek to work within Keynesianism to adapt economics to new realities, the field of economics, broadly speaking, discarded Keynesianism in favor of a return to the economics that had been in place prior to the Great Depression. Part of the irony of the introduction of more complexity in economic modeling is that it has largely been in the service of getting the field back to where it started—a classical, laissez-faire, general equilibrium outlook.

I spoke with Temin about the relationship between these phenomena during a conversation in his office in September, and his remarks are worth quoting at length:

There was a revolution against Keynesian thought in the 1970s, and part of that revolution was a rejection of the simplicity of Keynesian models. The models were too simple to account for the inflation and unemployment of that period—what Paul Samuelson called stagflation—and so economists who didn’t like Keynes went back to Robert Solow’s growth model. And then they went back further to an article written by Frank Ramsey in the 1920s. Ramsey’s theory of growth was grounded in the maximization of utility by the consumer. At MIT, as we got more sophisticated, we took the simpler Solow model and put it into the Ramsey framework to include this maximization element. The trend has been towards greater complexity in models, and so from the point of view of current economics, the relatively simple models that I use are too simple. Now why is that?

One answer is that these models are too simple to keep a profession of economics aloft. Simple models would work back when economics was seen as cutting edge and exciting. But now, in order to identify ourselves as economists, we’ve got to be doing something difficult.

As an example of this, I was visiting with Junior Fellows at Harvard the other day and I stumbled upon a debate between a young economist and a young physicist. They were discussing how to do proper economics, and whether it really is a science like physics. And the economist was arguing that yes, economics is a science like physics, and he gave as an example the fact that you can’t have an economic model today without including utility maximization. That’s just a requirement.

So economists need to have a more complicated field. You don’t want to think that just anybody could do this.

A second answer to this question of what is meant by “too simple” is that simple models can give misleading answers—a simple model doesn’t consider all of the variables that you want, or it leaves out something that you think is important. The Keynesian model, for example, looks at the aggregate, and so it doesn’t consider the distribution of income. Keynes talked about it a little bit, but he never put it into any model. Is that important?

Well, it is important because in the Keynesian model you have a government that has monetary and fiscal policies. But the government is elected and responsive to people, and if there is an unequal distribution of income then rich people have disproportionate interest in public policy. For the economist to try to understand why the good policies that are supported by the Keynesian model aren’t being used, he has to understand that it’s because politicians are interested in other things.

Could you put the distribution of income into a Keynesian model? Well, you probably could, but then you would have to put in a theory of the government. And then it would get to be a complicated model. And there are any number of complicated models—but the whole value of a simple model is that it’s simple. We live in a complicated world and if we just respond to sensory input that comes all of the time, the whole thing would be a hodgepodge. People who know vision say that if you go into a jungle, you see the bird you’re looking for. You pick it out. Whereas if you take a picture, then you see the whole jungle and you can’t see the bird. A model does the same thing. It isolates what you’re looking for. And there are different models for different purposes. Since the world is complex, no single model can show the whole world. You have to have different models for different questions.

For example, think about Keynesian unemployment. Unemployment is high at the moment, and the Keynesian model focuses your attention on that because that is what it’s is all about. But the very rich aren’t terribly interested in the unemployed, so they’re not interested in this kind of model because it gives the wrong answer, in a sense. It doesn’t deal with the questions that they’re concerned with. So, this question of what is a simple model is also a political question. Does it give you the answers that you want, from wherever you’re coming from?

In 1972, Robert Lucas published an article with Leonard Rapping, which presented a model of unemployment in the Great Depression.[16] The essence of their model was individuals maximizing their utility. According to Lucas and Rapping, interest rates were very low in the Great Depression—as they are now—and people would smooth their consumption according to the rate of interest. If the rate of interest was high, people would work hard because they wanted to consume at the moment. If the rate of interest was low, then people might take their leisure because they didn’t care much whether they consumed today or tomorrow. According to this view, people in the Great Depression were voluntarily unemployed, because the rate of interest was low, rather than being involuntarily unemployed, which is the Keynesian view.

That tells you two things. First, it tells you what was going on in public policy thinking at the time. Second, it shows you that the people who were anti-Keynesians had, in some sense, been anti-Keynesians all along. This was 1972, before the big crises of the 1970s. So it wasn’t that this was a new economics that came along in the midst of the crisis. As I say, Ramsey wrote in the 1920s and the expansion of Solow was in the 1960s. This kind of thing had been there all along and it was the changing of the balance of power within economics that displaced Keynes in the 1970s. There was an opportunity and these people took it.

Incidentally, this notion of unemployment being “voluntary” is a nineteenth-century use of the term. When we were an agricultural economy, there was always work for people to do. And if people didn’t work—they were sick, or pregnant, or not interested, whatever it was—it was an individual process. People weren’t aggregated to cities where there are not so many different activities. Starting in the late nineteenth century, going into the twentieth century, we got this notion of involuntary unemployment, which we now call Keynesian economics. People were together in cities and factories, and then they were laid off. That was involuntarily unemployment. But people today are again reverting to the nineteenth-century notion of unemployment. You can see this in the comments that are made about food stamps. You hear, “Well, people who need food stamps are lazy; we shouldn’t give them any so they’ll go out and find a job.” And the Keynesian argument is that they would find a job if there were a job. So you see how these things are all tied up in ethics and politics.

When I taught complicated models at MIT, I used to tell students about the assumptions behind the models. And, naturally, they became unhappy and just wanted to learn how to solve the models. But it is important to remember that one of the assumptions behind models that include utility maximization is that people are rational and maximize utility over long periods of time. Well, as more psychology has come into economics with things like behavioral economics, we have discovered that people don’t actually operate that way. So what are these models about? If you think about where people really do weigh alternatives and plan over long periods of time, you find out they do so in business firms. So these models that include utility maximization are models in which the primacy of the consumer has been replaced by the primacy of the business firm. And it’s not an explicit thing, it’s just the nature of the assumptions that are being used.

Another example is something called Ricardian Equivalence by my colleague Robert Barro at Harvard. Ricardian Equivalence says that if the government spends money or changes the budget, people will alter their savings or consumption to offset that because they’ll know that at some time in the future they will have to pay back the money borrowed. Well, if you’re a business firm, maybe that’s how you think. But people don’t think that way. So the question is whether the assumptions make sense for the people you’re talking about. And the question is also whether or not you are asking questions that you actually want to have answered.

I myself think that the Keynesian models are very useful, but I have values that are implicit in those models. Other people think differently.

The Great Depression, according to Temin, was the result of a shock to the system produced by World War I, coupled with an ideologically constrained response that exacerbated a bad situation and turned it into a crisis.

In Lessons From the Great Depression (1989), Temin argues that World War I’s impact on the global economy caused a disruption to the pre-war global economic system—which had been based on the gold standard—but did not make a depression inevitable. Instead, what served as the primary “propagating” mechanism for the economic downturn was the ideology of the gold standard, which produced counterproductive austerity. As Temin writes, “The issue is not any specific action, but the policy regime within which actions took place.”[17] Policymakers could not see that the prewar gold standard was now obsolete and could not be restored without inflicting massive damage.

Herbert Hoover, remembered today for his feeble response to the downturn, actually “wanted to promote recovery almost from the beginning of the Depression,” but his actions were hampered by “his view of the proper role of government” which was to “guide the private economy only by encouraging efficiency and cooperation between government and industry.” Hoover’s thinking was well within the mainstream. “The prevailing view was that the economy would equilibrate itself after a shock,” and his “policy stance derive[d] from the same view of the economy as the gold standard.”

What is the mechanism that makes the economy self-correcting? The gold standard. A depressed economy would import less, acquire gold, and reflate.[18]

This is essentially the price-specie-flow model of the economy whose limitations, even in the context of a pre-industrial economy to which it was better suited, Temin incidentally noted in The Jacksonian Economy. The way the model works, in brief, is this: if a country is exporting more goods than it is importing, it will be importing more gold—from international payments for its goods—than it is exporting. So more exports of goods will lead to more imports of gold. The country’s gold flow will thus be positive. But this abundance of gold will result in inflation, as more gold in bank coffers leads to more currency in circulation (or, more simply, a larger monetary base). This will cause inflation and raise the prices of the country’s exports while lowering the relative prices of its imports. The country will then begin exporting fewer goods (as they grow more expensive to other nations) and importing more goods (as they grow cheaper). This will lead to an outflow of gold, less currency in circulation (a smaller monetary base), deflation, and then an increase in exports and a decrease in imports. In the model, this process is repeated—or, perhaps it is better to say that the process repeats on its own—until equilibrium among countries is achieved. (Temin does not entirely dismiss the price-specie-flow model—indeed, he modifies it for use in The Leaderless Economy—but he argues that in its unmodified form it is not suited to an industrial or postindustrial economy.)

Within this context, deflation would not be seen as something bad because it would be seen as a necessary part of the mechanism of recalibration. “It was the international adherence to the rules of the classical economy that led to the worldwide Depression,” Temin writes.

The postwar gold standard spread the shock of the war in two ways, by imparting a deflationary bias to national economic policies of gold-standard countries in the late 1920s and by indicating that deflation was the appropriate remedy for the ills of the early 1930s. The first tendency created the conditions for the Depression throughout the 1920s. The second pattern directed national economic policies in ways that accentuated the economic decline.[19]

From the perspective of the present, one does well to note that the ideology hampering a productive response to the downturn was both widespread and pre-Keynesian. Indeed, even Keynes was initially constrained by it.

The hearing of the Macmillan committee [1930]…gave Keynes ample opportunity to press his opposing views. But mustered against the weight of economic orthodoxy, he could only…fight his opponents to a draw. He, along with everyone else, was debating within the confines of the gold standard.[20]

And thus, while the political leaders of the period don’t get a pass (“alternative policies” were “difficult” but “not…impossible,”[21] according to Temin), one can at least say that they adhered to policies of austerity in an environment in which a comprehensive alternative (within capitalism) had not yet been articulated.

Temin and Vine’s The Leaderless Economy argues that we are in the midst of a rare “end-of-regime” crisis wherein “the regime that governs the world economy is unable to provide the needed leadership.” Temin and Vines point specifically to the absence of a “hegemon,” which they define as “an economically powerful country that can promote cooperation between nations.”

In the nineteenth century, the international system’s hegemon was the United Kingdom. Britain’s hegemonic status was ended by the First World War, and what followed was the economically disastrous interwar period. The United States emerged from the Second World War as hegemon, forging a system for international economic order at the 1944 Bretton Woods conference that led to the so-called Golden Age of economic growth. In the early 1970s, the Bretton Woods arrangements governing the international system were dismantled by the United States in favor of a set of policies (deregulation, privatization, floating rather than stable exchange rates, trade liberalization, and so on) that came to be known as the Washington Consensus. Temin and Vines date the end of the U.S. run as hegemon to the onset of the 2008 financial crisis.[22]

Before proceeding further, it’s worth noting that British economic hegemony was coterminous with its “high colonialism” empire period (whence came the increased Chinese consumption of opium referenced in The Jacksonian Economy), while U.S. economic hegemony corresponded with its Cold War and post-Cold War military interventions undertaken in the name of anticommunism (1945-1989), humanitarianism (1989-2001), and anti-terrorism (2001-2008).

Additionally, hegemons often dominate systems that contribute to their own undermining. Britain’s position in, and contributions to, a system noteworthy for its repeated continental wars and imperial conquests, rivalries, and contestations was undone by a continental war between competing imperial powers. The U.S., meanwhile, came to grief at the end of the 2000s, a period in which conditions, as Temin and Vines put it, “were the culmination of the Washington Consensus.”

The book does not address the parallels between the economic hegemons and military hegemons, or the tendency of hegemons to undermine themselves over the long run, but when I pressed Temin on the point, he emphasized that in talking about a hegemon as a positive force, he and Vines were emphasizing the importance of an entity that can promote cooperation around policies that allow the system to function. Temin then adduced a domestic example: “Cooperation can lead to the kind of progress that we had in the New Deal. Politically, Roosevelt was a hegemon and led the country in a particular direction.” Their central point is that a sophisticated world economic system does not work well without a) an effective framework for its operation and b) a force capable of implementing and maintaining this framework. In entertaining the possibility that China might act as hegemon, for example, Temin and Vines did not seem to be anticipating a corresponding Chinese rise to global military hegemony. (Nor, it should be noted, do they anticipate China acting as hegemon any time soon, as its inward focus and domestic problems are presently forestalling this possibility.)[23]

Additional light might be shed on the concept of hegemon, and on Temin’s simultaneous pessimism and belief in the possibility of progress, by a 2005 review he published in the Journal of Interdisciplinary History. In an article entitled “A Hobbesian Approach to Political-Economic History,” Temin notes that the collection of essays on the relationships between economic growth and states and nationalism in Nation, State, and the Economy in History (2002) does not explicitly relate the experiences of different countries to each other, and then seeks “to impose some order on the vast coverage…from a Hobbesian point of view.”

He then asks, “Where do states come from?” To answer this question, he adduces Charles Tilly’s proposal that states “originated as protection rackets.”

[P]owerful—or perhaps criminal—agents offered to protect lesser people from dangers, including, prominently, danger from the agents themselves, for a price. Although this scenario may seem the essence of European feudalism, Tilly argued that it also was the model for the transition to modern states, carrying with it the implication that the state, once established, needs to maintain a monopoly of violence.

As bleak as the vision is, it gets bleaker—but it also allows for a certain measure of progress:

This notion that violence rules the affairs of men and women is a Hobbesian view of the world. Those people who are most willing, and perhaps most able, to fight and kill are those that end up in power. There is no reason to expect this violent streak to be correlated with intelligence, and therefore no reason to think that rulers are more capable of creating good government than anyone else. If in fact, the correlation between violence and intelligence is negative, early rulers should have been much worse than later ones.[24]

In other words, the Hobbesian state of nature produces conditions in which the most violent seize power, but the increased relative stability created by their rule can produce conditions in which less violent others can eventually gain power—and this can lead to even greater stability. Progress, in other words. In his review, Temin charts three phases: Hobbesian chaos, kleptocracy (“one criminal group acquires power over all others”), and then “over time…the original rulers may be replaced by more pacific ones, as the increasing order tends toward nonviolence.”  This latter phase is congruent with the emergence of liberal states. Of course, a reversion to Hobbesian chaos is never far away when the state (in whatever phase) ceases to function (as examples of this, Temin adduces Russia after 1991 and Iraq after the 2003 American invasion, both of which devolve from a operational form of kleptocracy to Hobbesian chaos).

This is a simple model, but one that is perhaps germane to Temin and Vines’ notion of the hegemon. Just as, in this model, rulers suited to Hobbesian chaos are less likely to be present in a state that has seen “increasing order tend[] toward nonviolence,” so a twenty-first century economic hegemon may be less inclined (or, more likely, less able) to act militarily like nineteenth-century Britain or postwar America. Early hegemons might be worse (with respect to concomitant external violence) than late ones. In this view of the hegemon, the prolonged existence and functioning of the international economy has the potential to produce conditions that will constrain the way a new hegemon can act on the world stage. And the emergence of these constraints (i.e., progress) has been enabled by a functioning system. This seems to be part of the reason Temin and Vines place so much emphasis on the importance of both the functioning and continuity of the system. As Temin told me when I asked him about whether there was a Hobbesian view underlying his work, “Without the veneer of civilization, things get Hobbesian indeed.”

But more useful, perhaps, than the concept of hegemon is Temin and Vines’ invocation of the Prisoner’s Dilemma. In this simple exercise from game theory, two people are separated and given a choice to declare their innocence or guilt. If the first individual declares he is innocent while the second individual admits guilt, the first individual receives the highest possible punishment. If the first individual admits guilt, he gets a lesser punishment, whether or not the second individual also admits guilt (an intermediate, risk-hedging strategy). If both individuals deny guilt, both walk free (a cooperative strategy). Thus, the option that has the greatest possible reward (denying guilt) also has the greatest possible punishment (if there is no cooperation).

Temin and Vines use the postwar Marshall Plan as an example of a kind of game theory in action. The U.S. could have refused to provide postwar aid to Europe (and so saved billions of dollars) and risked additional countries falling under sway of the Soviet Union. Alternatively, it could have offered aid in the hopes that Western European countries on the receiving end would resist Soviet advances. But the risk with that strategy was the possibility that Western European countries would both accept U.S. aid and fall under the sway of the Soviet Union.

Temin and Vines argue that the Marshall Plan did not simply represent a one-time project of aid. It also signaled an ongoing commitment on the part of the United States to Western Europe. It indicated that the United States and Europe would be playing a version of the Prisoner’s Dilemma for some time to come. This made it more likely, according to Temin and Vines, that Western European countries would accept U.S. assistance and resist Soviet advances in the future. (In the Prisoner’s Dilemma, the more times the game is played, the more often the cooperative solution is the outcome). It signaled an ongoing commitment to the cooperative solution between Western Europe and the United States vis-à-vis Soviet influence. This is the sort of cooperation Temin and Vines argue is necessary to rescue the world system from its current crisis, a crisis in which:

Each country—properly—thinks of its own interests, rather than thinking of the world as a system. But this kind of thinking is in danger of producing a world that does not add up.[25]

Temin and Vines’ recount how the world economy came to this point by focusing on the three major players: the U.S., the Eurozone nations, and China. The U.S. is undone by its adherence to the ideology of the Washington Consensus and secondarily by more recent reckless choices (i.e., wage war, lower taxes). In the Eurozone nations, the crisis comes from the establishment of a common currency that has been based on “a faulty analysis of how a monetary union was meant to operate” and an “inadequate recognition of the degree of political support that was required.” Meanwhile, China maintains a disruptive export-led growth strategy with a fixed exchange rate that does not allow its currency to appreciate relative to the dollar.

According to Temin and Vines, the key to restoring prosperity in the world system lies in all its players understanding an insight Keynes attained at the Bretton Woods Conference:

Keynes came to see that to achieve a well-managed national economy, one needed to consider not just the market for domestic goods and the need to achieve full employment—that is, internal balance. One also needed to include the market for goods traded internationally and the need to achieve external balance (that is, a satisfactory balance-of-payments position).[26]

Policymakers in each country need to consider how to achieve both kinds of balances, and “think not just about policies in one country, but also about how policy should govern the relationships among countries” in order to restore them.[27] “The task now,” they write, “is to sustain global growth in much more difficult circumstances than prevailed before the crisis.”[28]

The problem of insufficient aggregate demand in America and Europe needs to be solved by an expansion of government spending. This means putting policies of fiscal austerity on hold and even temporarily reversing them. Debt problems of various sorts need to be managed to make this possible. Hegemonic leadership will be needed to set us on this course both internationally and in the United States and the Eurozone. The destabilizing [i.e., export-led] policy of Germany needs to change into one of domestic expansion to complement expansion in the Eurozone as a whole. And the destabilizing policy of China needs to change into one of domestic expansion to complement expansion in the West.[29]

Temin and Vines clearly hope that policymakers are among the readers of The Leaderless Economy, and absent the imminent emergence of a hegemon, one wonders if the force enjoining nations to play the Prisoner’s Dilemma the right way will not be a single economically powerful nation, but an awareness of the ongoing threat of more crises. After all, the Marshall Plan emerged under a clear threat—U.S. fear of Soviet domination of all of Europe. But it is not clear that the threat of repeated and ongoing economic crises appears as saliently to world policymakers. And of course, it’s also not clear how many times the game can be repeated before its best possible outcome is no longer available.

I noted earlier that the poor policies and decisions of the 1930s were made in a pre-Keynesian environment. Why then are countries like the United States or Great Britain now unnecessarily pursuing policies of austerity that inflict further pain on their populations, and which have been discredited by history as useful responses to domestic economic crises? Why, in the midst of a crisis in which some countries are short-sightedly pursuing their own interests, is the United States, for example, not even really doing that with respect to its own population?  Temin’s answer to this question helps explain his present pessimism, and makes the insight and understanding necessary to achieve his longed-for international cooperation seem even further distant.

One of the things I talk about in Lessons From the Great Depression is that in the 1930s, governments practiced austerity to try and preserve the gold standard. And what they did was turn a recession into the Great Depression. And that seems to be what everybody is doing now with austerity. In the U.S., the Republicans are pushing for austerity. The United Kingdom, which has no particular debt problems, is doing austerity because the Conservatives are in power. And the Germans are doing austerity. People who have other choices are making the choice for austerity. In the 1930s, they were doing austerity because they were adhering to the ideology of the gold standard. In their minds, austerity was the only way to preserve the gold standard, which would eventually restore prosperity. Today the justification for it is debt. But debt for the United States is de minimus; our debt service is a minor part of our government spending. So you have to believe that there’s another motive, and I think the motive is to destroy the New Deal. The reason that I’m pessimistic is that I think we’re engaged in class warfare. The new technology has given rise to a very skewed distribution of income around the world, but particularly in the United States. And the rich are trying to destroy the New Deal, and they don’t even feel that they have to give a logical argument for it. They say the debt is killing our children, but the debt has little to do with our children. It is used as a cudgel to affect current spending. But if they’re using illogic, there must be some motive—and I think the motive is to destroy the welfare state.

In my interview with him in 2011, Temin described himself as “a kind of endangered species” because he is an economic historian. If that is the case, it’s another mark against the field of economics. Economists who think through complex, actually existing systems and have an understanding of history and its current applications that they can communicate to those outside the field ought to be in greater abundance. When encountering Temin’s work, one feels like one is watching someone who has discovered a smashed, twisted piece of metal on the side of a particularly dangerous stretch of unregulated road. While his colleagues variously formulate ever more exotic hypothesis to describe what it might be (part of a helicopter blade? the rudder of a hydroplane? a fallen piece of satellite?), Temin methodically hammers the metal out until, getting it back into recognizable shape, he shows that it is a fender that used to fit onto a car.



[1] Temin, Peter and David Vines. The Leaderless Economy. Princeton, NJ: Princeton University Press, 2013. v.

[2] Ibid. 89-90.

[3] Temin, Peter. The Jacksonian Economy. New York: W.W. Norton & Company, 1969. Hammond quote on p. 20.

[4] Ibid. 174, 177.

[5] Wallace, Andy. “A. Temin, Education Advocate.”Philadelphia Inquirer. 13 Mar 1992

[7] Krugman, Paul. “Who was Milton Friedman?”New York Review of Books. 15 Mar 2007.

[8] Temin, Peter. Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989. 38.

[9] Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton & Company, 1976. 178. [Emphasis added.]

[10] Monetarism as a primary public policy tool was abandoned in the early 1980s.

[11] Temin. Did Monetary Forces Cause the Great Depression? 27.

[12] Ibid. 53.

[13] Ibid. 93.

[14] Temin. The Jacksonian Economy.  70.

[15] Krugman. Op Cit.

[16]Lucas, Robert E. and Leonard A. Rapping. “Unemployment in the Great Depression: Is There a Full Explanation?” The Journal of Political Economy, Volume 80, Issue 1 (Jan-Feb 1972). 186-191.

[17] Temin. Lessons from the Great Depression. 25.

[18] Ibid. 26-7.

[19] Ibid. 34, 42.

[20] Ibid. 64.

[21] Ibid. 82.

[22] Temin and Vines. The Leaderless Economy. 19.

[23] Ibid. 254.

[24] Temin, Peter. “A Hobbesian Approach to Political-Economic History.” Journal of Interdisciplinary History, XXXV:4 (Spring, 2005). 605-614. [Emphasis added.]

[25] Temin and Vines.The Leaderless Economy. 232.

[26] Ibid. 101.

[27] Ibid. 103.

[28] Ibid. 230.

[29] Ibid. 248.