Why Did Productivity Fall So Much During the Great Depression?

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Abstract

This study assesses five common explanations for the large decline in U.S. total factor productivity (TFP) during the Great Depression: changes in capacity utilization, factor input quality, and production composition; labor hoarding; and increasing returns to scale. The study finds that these factors explain less than one-third of the 18 percent TFP decline between 1929 and 1933. The rest of the decline remains unexplained. The study offers a potential explanation: declines in organization capital, the knowledge firms use to organize production, caused by breakdowns in relationships between firms and their suppliers, for example. As some firms failed during the Depression, efficiency in surviving firms decreased; managers had to shift time away from production in order to establish new relationships, and firms had to shift to unfamiliar technologies that initially were operated inefficiently.

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This article is reprinted, with permission, from the American Economic Review (May 2001, Vol. 91, No. 2, pp. 34-38). Copyright 2001 by the American Economic Association. The article was edited for publication in the Federal Reserve Bank of Minneapolis Quarterly Review. https://doi.org/10.1257/aer.91.2.34

Staff Report 285

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