 Hi, this is Professor Gerald Friedman, Department of Economics, University of Massachusetts at Amherst. And we're here today to talk about the Great Depression. Now, the phrase Great Depression, most people refers to the 1930s. But at this point in the American experience, its arguable could refer to several different Great Depressions. There was a pretty big depression after 1837. There was another really big one in 1873 to 1777 or so. 1893 depression lasted for a couple of years. The 1930s was the longest of the Great Depressions. And maybe the deepest, the fall in economic output during the Great Depression of the 1930s, from the economic peak in 1929 to the nadir, the trough of the Depression in 33, was close to 30% in real terms. That's bigger somewhat than 1893 to 95, or 1873 to 75, or 37 to 40. And the Great Depression of the 1930s lasted for arguably over a decade. That is definitely longer than the early Great Depressions. It's interesting, by comparison, what we've had since 2007 is a very steep fall, very quick fall, the first six months or so, or the first year of the current Great Recession. That's what the people are calling it. For the first year or so, we tracked the Great Depression of 1929 very closely, the fall in industrial output paralleled that of the earlier Depression. Fall in employment was just as steep, but it leveled off. After President Obama came to office, and the federal stimulus kicked in, and also monetary policy has been very, very expansive. So between aggressive fiscal and aggressive monetary policy, we haven't had a Great Depression since 2007. But we've definitely had a Great Recession. Still, OK, we've got the Great Depression 1929 on. The reason I talk about how many others there are is I want you to put that in the back of your mind that economic downturns are not unusual. Here's my dog, Beowulf. Yes, Beowulf is here. He likes economics. He thinks economics is fun. Right, Beowulf? Good boy. OK, go back to lying down. OK, recessions and economic downturns are not unusual. They are the norm. That is not the way most economists approach this. The second thing to talk about with the Great Depression of the 1920s, 1929 to the 30s, is that it is a subject that most economists know nothing about and, more important, don't want to know about. If you take your standard macroeconomics textbooks, intro or intermediate, or even the graduate level, you would think that recessions and depressions, which occur with such regularity, would be a major subject of discussion. We have a business cycle that's been going on for 200 years or so of capitalist economic activity in the United States, a business cycle with downturns coming about every seven or eight years, with every third or so downturn being a major crisis. So just in my adult lifetime, we had major downturns in 1970, 1975, 1979, 1981, 1987, 1990. Then we had a little bit of a break for a while, then 2000, and then a little bit of an extended break in the 2007. This happens all the time. And the Great Depression of the 1929-30s was the biggest. So you think you'd want to study this a lot. You'd want to really learn about this, because this is the opportunity to see what drives economic downturns. And economic downturns are a major part of the economy. No, that's not the way economists look at it. Most economists assume economic stability. And they do this by upholding something called Sey's Law, which is named after Jean Baptiste Sey, a French economist, a contemporary, and friend of Adam Smith. Now, mind you, if you go to economists and you say, do you believe in Sey's Law? They'll say, oh, no, no, of course not, of course not. Don't believe them. They'll say they don't, but they do. And I mean, maybe they'll be honest and they'll say they do. Sey's Law kind of went into ill repute because John Maynard Keynes, during the Great Depression, marked it and showed how it was ridiculous. And of course it's ridiculous. We have all these recessions all the time. But most economists still operate in a world of Sey's Law. And this is what you get in the textbooks for macroeconomics. OK, Sey's Law says that production is always done with intent to consume. Therefore, there can never be more production than people want to consume. Supply is the same as demand. Take that one step at a time. Production is always with intent to consume. You never produce except with intent to consume. This kind of makes sense. Do you think that Robinson Crusoe on a desert island would be producing only with purpose of consuming? Why else would he bother reaching out and picking up the coconuts? Why would he do that if he didn't want to eat a coconut? Why would he make a boat if he didn't want to go out on the water? True for Robinson Crusoe, as we'll see in a few minutes. Not necessarily true for a capitalist economy. Second, because production is with intent to consume, either consume the thing you're producing or to exchange it for equivalents, supply can never exceed demand. Well, that follows logically. It makes sense. But even given that, there may be problems with supply and demand that Say's Law glosses over. Because Say's Law operates in the world of Robinson Crusoe, or maybe Robinson Crusoe exchanging coconuts with the fish that his man Friday caught. Or maybe Robinson Crusoe fishes and gives Friday fish in exchange for coconuts, whatever. What happens when you bring money into the picture? Robinson Crusoe doesn't exchange his coconuts anymore for fish. He sells his coconuts, accumulates money, and then uses that money to buy the fish. There are good reasons why people do this. Bought it is difficult to coordinate. It's simpler to just sell your fish when you've got them and then use the money some other time. The problem is once you start doing that, you're not producing just for consumption. You're producing for the money. And yeah, you plan to use the money, but it's not necessarily instantaneous. So you've got a potential disequilibrium. Now, what do you actually do with the money? You take the money and you put it in a bank. Because it's safer that way. You don't want to just stick the money in a hole in the ground. You'll forget where it is. Somebody else may dig it up. Your dog, Beowulf, may go and looking for a bone, may dig up your money and spread it all over the place. So no, you take your money and put it in the bank. What does the bank do with the money? The bank takes the money and lends it out to somebody else, figuring that you're not going to ask for it very soon. In the meantime, they'll give the money to Dan. Dan uses the money to buy a camera. Dan's happy. Dan has his camera. He's in his business. Then you go to the bank. You want your money because you want to buy fish. You're finally ready to buy your fish. The bank doesn't have the money. It had lent it out to Dan. So it goes to Dan says, we need the money. And Dan's like, shit, I don't have the money. The money's in my camera. They said, well, we don't care. We want the money. We needed to pay off this other guy. So Dan has to sell his camera at a loss. Dan said, worse than that, Dan's laying off the two people he hired because he doesn't have a camera anymore. So he doesn't need a camera carrier and he doesn't need a camera. You get the point. Once you bring money into the picture, you bring in the possibility of economic collapse because of problems with the banking system and with the financial system, with the monetary system. So that said, economists basically kind of take it for granted that say's law will hold. They like it that way. It fits with their prejudices. They like to think, OK, now we've got an explanation for the economy. It's rooted in the behavior of individuals. Everything's fine. Problem, though. In a capitalist economy, production is not for consumption. Production is for profit. Dan here isn't just working to consume the video or the products of his video. Dan's working because some people hired him to produce a video on which they hope to make a profit. They're going to keep making videos. They're going to keep making videos as long as they can, make profits from them. Capitalist economies are not driven by people's needs. They're not driven by the desire to fulfill use values. They're driven by the drive for surplus value. Therefore, capitalist economies are always expanding, expanding, expanding, expanding.