Technological change and the roaring twenties: A neoclassical perspective

Abstract

Annualized output growth in the United States was highest during the 1920s, as compared to any other of Field's (2003, 2009) growth cycles. This motivates us to address the causes of the Roaring Twenties in the United States. In particular, we use a version of the real business cycle model to test the hypothesis that an extraordinary pace of productivity growth was the driving factor. Our motivation comes from the abundance of evidence of signi…cant technological progress during this period, fed by innovations in manufacturing and the widespread introduction of electricity. Our estimated total factor productivity series generate arti…cial model output that shows high conformity with the data: the model economy successfully replicates the boom years from 1922-1929.

Sunspots and Credit Frictions

“…The introduction of a collateral constraint into this framework is likely to prove productive. In addition, Harrison and Weder (2009) examine the Roaring Twenties as a time of technological progress. Evidence of optimism during that decade bodes well for our model.…”

Can general purpose technology theory explain economic growth? Electrical power as a case study

“…This interpretation of US economic growth is supported by other research. Harrison and Weder (2009) stress the very high total factor productivity growth of the 1920s as evidence of a supply-side technology based explanation of high US economic growth. Although Field (2011) raises some doubts about the idea of GPT he agrees with the productivity bonus effects of electricity use in manufacturing during the 1920s.…”

“…Δ K can be interpreted as investments not related to electricity. In line with conventional assumptions (see for example Harrison andWeder 2009, p. 366, or Field, 2011, p. 6) we set β = 0.7. This parameter is also consistent with the estimates of factor shares from Matthews et al (1982) for the interwar UK economy.…”

Economic Crisis and Economic Theory*

“… US Total Factor Productivity (TFP), 1892–1941, Logarithmic Scale. The Lower Part of the Figure Shows the Deviations from Constant Time Trend ( Harrison and Weder, 2009 ) …”

“…The reason behind this failure is the rapid rise of TFP, which hovers significantly above its long run average from 1935 onwards (see Figure 2). In (Harrison and Weder, 2009) Temin's (1976) emphasis on contractions of real aggregate demand beginning with the market crash and continuing through the first years of the thirties. Temin's argument rests on an episodic pattern of consumption which bears no resemblance to that of other recessions.…”