The interaction of economic theory and policy during the Great Depression of the 1930s

In a scientific discipline like that of economics with its lack of controlled experiments it cannot be surprising that the event of the Great Depression of the 1930s is still considered a singular possibility for putting economic theories to the ultimate empirical test. Besides the pre-occupation with this period by economists and historians alike is reinforced by the fact that the era between the wars is also singled out as one of "high theory", that is of the perfection of old ideas and the revolutionary development of new ones. In particular in the field of monetary and business cycle theory controversies abounded between adherents to the varieties of neoclassically-inspired theories, proto-Keynesian and proto-monetarist approaches and those genuinely converted to the Keynesian revolution. Thus the Great Depression and its theoretical explanations provide the material for a case study on on the interconnections between economic theory, the shaping of public opinion and the options for economic policy. It is a crucial element in the interaction between theory and policy, that the belief in (an orthodox version of) economic theory defines the constraints and thereby delineates the room of manoeuvre for economic policy, sometimes so strongly that only one viable alternative appears to be left for action. The analysis of this interaction lies at the core of the project, which by its very nature must attempt to combine the approaches of economic history, of the history of economic thought and of modern economic theory. Due to obvious restrictions a few topics have been singled out to be dealt with specifically. These are on the one hand a comparison between the various theoretical approaches towards the question of wages, or in particular of wage cuts as a remedy for depression, in the 1930s, and on the other hand the unique position of the Austrian school of economics in its relation to other competing approaches as well as its influence on actual economic policies.