Understanding the Lesser Depression
J. Bradford DeLong, U.C. Berkeley, August 2011
What should you takeaway from this background chapter? I hope you take four things away from it.
First, I hope you have learned that our market system irregularly but semi-periodically fails in a disturbing and substantial way: it pukes up large numbers of workers—two or three or five percent of the adult population—into excess unemployment, out of which they are only gradually and slowly absorbed. Workers who in normal times have no trouble finding and keeping jobs paying the prevailing wages find themselves unemployed in large numbers, and can stay unemployed for a long time.
Second, economists disagree about the closets and nature of these downturns. There are four groups of economists who I believe are largely if not completely wrong: those who think downturns are on inevitable and unavoidable consequence of previous expectational errors, those who think that if only we got rid of government intervention in financial markets such downturns would cease, those who see their cause in workers’ desires to take a “great vacation”, and those who see their cause in a “great forgetting” of how to make things. I think these four groups simply have not done their homework. They have thus fallen victim to what Joseph Schumpeter liked to call the “Ricardian Vice”. The question of why people would not do their homework would be a difficult one, were not for the fact that this is something that you promised have been doing for sentry witness the name Ricardian vice.
Third, these downturns have their origin in any of a number of different causes all of which however have one thing in common call they all in do's and excess demand for financial assets, and the flip side of this excess demand for financial assets is deficient demand for currently produced goods and services, is a general glut.
Fourth, and excess demand for financial assets is an animal of a different kind then a normal excess demand for a currently produced good or service. The market economy is good at dealing with an excess demand for a currently produced good or service like yoga lessons and its flipside of excess supply of another currently produced good or service like espresso machines. The market can move labor, capital, and resources from the one to the other relatively smoothly. By contrast, and excess demand for financial assets causes large-scale unemployment among those who used to make currently produced good and services, with no countervailing pressure in the system to rapidly absorbed the unemployed into making or doing anything else.