I wrote yesterday about the difficulties of the concept of maximization as it appears in economic theory. There is an additional point of confusion about maximization that I need to mention. Depending on the theorist, the assumption of maximization may include the assumption that every institution, including every household and business, is fully leveraged, that is, that they are going all out in pursuit of the particular thing they are trying to maximize. The assumption could be that people have borrowed as much as money as would be useful for them in achieving this goal, within the limits of what they are able to borrow.
In reality, no one is going all out for very long, for the simple reason that no one is absolutely sure what they are going for all day long. As I mentioned yesterday, most of us are not particularly clear about what we are trying to accomplish, and when we feel doubt and uncertainty, our actions are more limited.
Nevertheless, the assumption that households are fully leveraged was not so far from the truth in the Great Depression. It was a desperate time, and for more than a few households, it took everything they had just to get food, clothing, and education for everyone in the house. “Took everything they had” is a phrase that indicates being fully leveraged, or going all out. The current times are similarly desperate for those households that have lost their home and all of their jobs, but that is a much smaller number of people.
What this means is that some of the economic models that helped to describe the Great Depression will not do so well in describing the current recession. In a way, going all out means lacking flexibility, having little choice about what you do. We have far more choices and possibilities now than in the 1930s, and that will still be true even if economic activity declines further.
Clothing is one example of this. Clothing is far more durable now, and in a pinch, you might get through a decade wearing the clothing you already have. True, this depends on your size not changing, and you would have to get more socks and shoes eventually, but still, the quantity and durability of clothing available now is a big improvement over what you would find in 1930.
For this and a dozen other reasons, households that lose most of their income because of the economy this year do not face the same desperation that they might have in the 1930s, and this means they have more choices, more flexibility in responding to the state of the economy. People with more flexibility means the economy as a whole has more flexibility, and with more flexibility, it is easier to find solutions to problems. This is the main reason why I believe a repeat of the Great Depression is impossible. Even if there were to be an economic downturn on the scale of the Great Depression, with economic activity falling another 24 percent, it would not be the same experience at all. People might find it bewildering, but in the Great Depression, there were businessmen in three-piece suits whose supper depended on how many pencils they could sell on the street. If a depression happened now, we could do much better than that.
