Understanding the Lesser Depression 1.3: Background: Conclusion
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Economics 24-1: Enrollment Limit: 10. Freshman Seminars: Understanding the Lesser Depression: August 26, 2011: First Class Readings...


Most Fridays 4:10-5:45, Evans Hall 597. Alas, this is a freshman

J. Bradford DeLong delong@econ.berkeley.edu 925.708.0467.

These freshman seminars are supposed to meet for about 12 hours--50 minutes a week for fourteen weeks. I find that 90 minutes works a lot better than 50, so I propose that we meet most Fridays--a total of fifteen hours plus an end-of-semester lunch.

Proposed topics:

  • Aug. 26: Background
  • Sep. 2: The Great Moderation and the Housing Boom
  • Sep. 9: NO CLASS
  • Sep. 16: Banks, Derivatives, and Risk
  • Sep. 23: NO CLASS
  • Sep. 30: The Collapse of the Housing Bubble and the Start of the Financial Crisis
  • Oct. 7: The Financial Crisis and the Collapse of Demand
  • Oct. 14: NO CLASS
  • Oct. 21: Dealing with the Collapse of Demand: Bernanke, Paulson, Geithner, Bush, and Obama I
  • Oct. 28: Can We Understand the Republican Counter-Narrative?: Viner, "Mr. Keynes on the Causes of Unemployment" http://tinyurl.com/dl20110612e
  • Nov. 4: The Obama "Pivot" to "Deficit Reduction"
  • Nov. 11: NO CLASS
  • Nov. 18: Assessing the Obama Administration: Suskind, Confidence Men
  • Nov. 25: NO CLASS
  • Dec. 2: Politics and Sovereigns: The European Crisis
  • Dec. 9: Lunch?


Economists are, overwhelmingly, what one of my teachers, the late Rüdiger Dornbusch, used to call "goldsmiths": they start with a few organizing principles--principles of human psychology and motivation and of market structure--and work them with precision, deducing theoretical corollaries and consequences that can then be used to analyze the actually existing real world out there. We could do that in this freshman seminar, but then we would be simply repeating Economics 1: that would largely waste your time.

Moreover, there is a danger in attempting to be a goldsmith if you are not a very good one. You then become what Rüdi would scornfully call a "plumber": somebody who was obsessed with constructing an elaborate Rube Goldberg-like device without a clear vision of what it would be good for and would find at the end that he had constructed something that gave absolutely no insight into what was going on in the real world.

Preferable, Rüdi thought, to be what he called a "pig": to leap into a subject with vigor and wallow in it until you emerged with a defensible and coherent point of view, even though it did not proceed with goldsmith-like precision from a few organizing principles of human motivation and market structure.

We are going to be pigs--and, for Rüdi, to be called a pig was to be given a compliment.

So let's look first at some data about the recent history and current state of the economy--at the Lesser Depression in which we are enmeshed--and then look at some old-fashioned economists' attempts to think about and understand economic situations like the one we seem to find ourselves in today:


The Civilian Adult Employment-to-Population Ratio

FRED Graph  FRED  St Louis Fed

Civilian adult employment-to-population ratio from the Bureau of Labor Statistic's Current Population Survey.

Things to Notice:

  • Seasonal adjustment
  • Feminism
  • Business cycles
  • Vs and Ls

Actual and "Potential" Real Gross Domestic Product

FRED Graph  St Louis Fed 2

Estimated inflation-adjusted value of all marketed goods and services produced in the United States (plus the imputed rental value of owner-occupied housing a calculated by the Bureau of Economic Analysis, plus government consumption and investment valued at cost), and Congressional Budget Office estimate of "potential".

Things to notice:

  • Long-run growth
    • Population growth at 1% per year or so
    • Real standard-of-living growth: ln(13/2)/60 - 0.01 = 2.1% per year or so
  • Potential output
  • Small relative size of our business cycles

Actual Real GDP Relative to Potential Real GDP

FRED Graph  St Louis Fed 3

BEA estimates of real GDP divided by CBO estimates of potential output.

Total Spending; Nominal GDP

FRED Graph  St Louis Fed 4

#BEA estimate of the current-price value of all marketed goods and services produced in the United States (plus the imputed rental value of owner-occupied housing a calculated by the Bureau of Economic Analysis, plus government consumption and investment valued at cost).

Prices and Quantities: Total Spending and Average Prices

FRED Graph  St Louis Fed 5

BEA estimates of nominal GDP and of the "implicit price deflator" corresponding to its estimates of nominal and real GDP.



  • Jean-Baptiste Say (1821), Letters to Malthus on Political Economy and Stagnation of Commerce http://tinyurl.com/dl20110812a, Letters One, Two, and Three.
  • Thomas Robert Malthus (1820), Principles of Political Economy http://tinyurl.com/dl20110812b, Chapter 5 Section 4: "Notes on Ricardo's Theory of Profits".
  • John Stuart Mill (1844), Essays on Some Unsettled Questions in Political Economy http://tinyurl.com/dl20110812c, "Essay II: Of the Influence of Consumption Upon Production".


  • J. Bradford DeLong (2011), Understanding the Lesser Depression: Background http://tinyurl.com/dl20110822a
  • John Maynard Keynes (1936), The General Theory of Employment, Interest and Money http://tinyurl.com/dl20110812d, Chapters 1 "The General Theory", 2 "The Postulates of the Classical Economics", and Chapter 3 "The Principle of Effective Demand" Section 3.
  • William Baumol (1999), "Say's Law", Journal of Economic Perspectives http://tinyurl.com/dl20110812e.

Some Warm-Up Questions:

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