Reading some of the reactions to this post, I realized that quite a few readers believe that protectionism played a major role in causing the Great Depression, and even believe that this is what all the experts believe. Not so.

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

But did Smoot-Hawley and other trade restrictions cause the Depression? No.

Bear in mind that what protectionism does, according to textbook economics, is to cause a misallocation of resources, reducing the economy’s efficiency. It does not cause mass unemployment of resources — which is what the Depression was about.

But, you say, protectionism led to falling exports! Indeed. Also falling imports. It’s not at all clear what effect all this had on overall demand. Insofar as it did, it was because tariffs were a form of tax increase — but in that case you should be focusing on the whole range of fiscal actions, not just the tariff hikes.

So why do so many people say that protectionism did it? Partly, I think, because the early years of the Depression were marked by a sharp contraction of trade; everyone likes to reprint the famous Kindleberger spiral diagram:

And this picture is often treated as evidence that trade contraction was somehow driving the slump. As it happens, however, we have more recent experience to compare and contract: as Eichengreen and O’Rourke have shown, trade in the first year of the current crisis fell much more than in the Depression, even though there were no major protectionist moves:

Eichengreen and O’Rourke

That is, the world slump drove the trade contraction rather than the other way around.

More broadly, I’ve written before that the attempt to place blame for the Depression on protectionism is a sort of Noble Lie, an attempt to scare people into trade policy that’s good for other reasons.

But going back to Hayek: attributing the failure to recover to trade restrictions was, in a way, characteristic. Hayek, like his modern followers, never could get his mind wrapped around the fact that the key problem in depressions, and the key observation his theory needed to explain, wasn’t misallocation of labor and other resources — it was mass unemployment. It’s not surprising to see that in the depths of depression he was focused on removing what was, in the end, a minor source of allocative inefficiency. But it’s a stark reminder of the extent to which he really, truly, didn’t get it.