Factor Income Distribution in the United States During the 1920's: A Reexamination of Fact and Theory

The traditional economic history of the 1920's emphasizes the importance of changes in the structure of the American economy. It is argued that three structural changes—monopoly power, technical change, and income distribution—tainted the prosperity of the twenties. The main features of this explanation are easily summarized. Rapid advances in technology reduced the costs of producing output. At the same time corporate monopoly power was increasing thereby restricting the tendency for output prices to fall. In the presence of weak labor unions, the interaction of technical change and monopoly power had the result of increasing “profits” relative to “wages.” The shift in the distribution of income not only favored owners of capital but it also created an imbalance between investment and consumption. Consumption expenditures could not keep pace with investment expenditures and this tendency towards underconsumption, in turn, was one reason for the onset of the Great Depression.