The Great Systems Debate and the Great Depression

The political and economic turbulences at the beginning of the 20th century challenged fundamental building blocks of 19th century economic liberalism. On the one hand, pessimism about markets and the price mechanism was spreading, caused by the increasing degree of market power in the 1920s. Moreover, the experience of the Great Depression cast doubt on the traditional believe in the self-healing mechanism of the business cycle and the desireability of the Gold Standard (e.g. Feinstein et al., 2008). On the other hand, the war experience itself led to an increasing optimism about the possibilities of economic plannig, culminating in certain aspects of bold economic experiments such as the New Deal (e.g. Barber, 1996).

Contemporary economists debated the pros and cons of centralization. Barone [1935] (1963) and Lange [1936, 1937] (1964) developed mechanisms for resource allocation in a planned economy, while Mises (1920) and Hayek (1945) drew attention to what they perceived to be an insurmountable flaw: the absence of price signals. The prediction of Schumpeter [1942] (1994) about the inevitable end of capitalism turned out to be too pessimistic – instead, Keynes’ General Theory [1936] (2007) provided a crisis intervention framework within a market economy, which, in the 1950s, became part of mainstream economics.

References
Barber, W. J. (1996), Designs within Disorder. Franklin D. Roosevelt, the Economists, and the Shaping of American Economic Policy, 1933-1945 . Cambridge, New York, Melbourne: Cambridge University Press.
Barone, E. (1963), “The Ministry of Production in the Collectivist State.” In: F. A. Hayek (Ed.), Collectivist Economic Planning, 6th ed., chap. Appendix A, 245–290, London: Routledge & Kegan Paul LTD.
Feinstein, C. H., Temin, P., and Toniolo, G. (2008), The World Economy between the World Wars. Oxford: Oxford University Press.
Hayek, F. A. (1945), “The Use of Knowledge in Society.” American Economic Review 35, 519–530.
Keynes, J. M. (2007), The General Theory of Employment, Interest and Money. New York: Palgrave Macmillan.
Lange, O. and Taylor, F. M. (1964), On the Economic Theory of Socialism. New York, Toronto, London: McGraw Hill.
Mises, L. v. (1920), “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen.” Archiv f¨ur Sozialwissenschaft und Sozialpolitik 47, 86–121.
Schumpeter, J. A. (1994), Capitalism, Socialism and Democracy. London: Routledge.