Studying Depressions

Key Concepts and Generalizations:

The Pedagogy of Studying Depressions

Students will have learned by the culmination lesson the steps in understanding and building a theoretical model. The first step entails a definition of primitive terms. Terms, in their relationships, form concepts. The empirical assemblage of concepts gives us testable hypotheses or at least partial hypotheses. With further investigations, the students should be able to make generalizations as to the mechanisms of the major events in history. Generalizations are global statements that have universal validity measured in terms of probability. In this case, students will have researched the Great Depression. At the highest level, students, after years and decades of study, may find law-like properties operating in the political economy. That is not necessarily a realistic goal for students in an introductory course. However, the teacher must make them aware of such rare phenomena. There might be a scholar in the making, sitting in the class. By an interactive approach, the great teacher discovers and develops such talent as an ideal. Before having a theory, the student must find the limits of a problem. In this instance, teacher and students can investigate the Great Depression of 1929 to 1941. As a baseline, historians define a depression as an instance where 25 percent of the workforce are unemployed.

Let students write a creative essay on the relationship of money, employment, and interest rates, engineered by the Federal Reserve Board. Reading on-line, let them use copies of the Wall Street Journal to render an assessment of the state of health of the economy in today's world. They can place this essay on a listserv so that all can partake of an electronic forum to exchange ideas.

General Theory of Employment, Interest, and Money

Problem I. Great depressions are caused by oversupply on a worldwide scale in capitalism. Hence, commodities, including labor power, must be dumped (including labor by layoffs) to attain your market price. That will lead to deflation; hence, there will not be a profit.

Are there circumstances where producers can be subsidized by government to stabilize the supply and demand curves of the free marketplace in a democratic society?


A. People run to the banks to salvage their savings accounts during economic crises. However, there are no funds in the banks because bankers have lent out their capital to speculators who are betting that the economy will continue “hot” in the stock market. There is then a crisis of overproduction. Hence, deflation is the result. The stock market in 1929 “crashed,” real estate ventures soured, and the banks failed.

B. The American economy in 1929, when it collapsed, initiated a world recession because American banks were the world bankers, who lent money to develop other nation’s economies, and brokers of stocks to the world, through the New York Stock Exchange. When Americans defaulted on their loans for imports, including capital from investors both domestic and from abroad, their credit expired. The American promissory note no longer had universal validity. The cycle began when Germany defaulted on its World War I war debts (the punitive payments).

C. Pegging the currency to the gold standard did not help fend off the 1929 debacle. It is not gold that holds up a banking system, since it is only a commodity with a price. It is full faith and credit in the integrity of government and business by the people that maintains the monetary system and the repayment of debt by redeeming promissory notes issued by the government and corporations. By removing the gold standard, the government effected an inflationary outcome by flooding the money markets with fresh volumes of cash.

D. Deficit spending can stimulate the economy and promote economic growth. That means that the government will indefinitely allow budget deficits. That is a key assumption of the demand side economics of John Maynard Keynes. If you put people back to work, there will be absorption of surplus inventory and generation of more taxes because the population base has been expanded and its attendant buying power permits the resumption of “normal” consumption.


1. By manipulating interest rates and money supply through the Federal Reserve Board, its chairperson can stimulate the economy.

2. If government employs people, then they will have the purchasing power to regenerate new businesses with the dispensation of credits from Washington to start up venture capital firms.

Definitions and assumptions

1. A depression can be defined as 25 percent unemployment of the work force. Americans endured that for more than ten years. There was the danger of political, economic, and social revolution. Just examine the Huey Long phenomenon in Louisiana.

2. Aggregate supply and demand: define the price of a good or commodity by the intersection of the two curves.

3. The New Deal is Franklin Delano Roosevelt's application of Keynesian principles to the creation of government organizations by the executive branch to stimulate the economy (pump priming, to give one example).

4. The Invisible Hand is a theme that runs from Adam Smith to Milton Friedman.It is a mechanism that allows the sovereign people, who are rational, to pursue their own economic interests selfishly because only they know best what they want and where in the division of labor they will take their jobs. In the marketplace, if the mass of people have full information and an open market with no externalities such as restrictive monopolies or prohibitive tariffs, then they will all benefit economically and be happy. They will rationally find the niche in the political economy that is most profitable in payoff and most conducive to actualizing the potential of their talents. There is a complementarity of interests in the marketplace in the final analysis, with an acceptable level of unemployment to keep wages constrained.

5. The price of money is to be determined not by gold but by the strength of the economy. That is a psychological and sociological measure by the people of their belief in capitalism, not only to produce to satisfy consumer wants but to redeem debt. Currencies must be floated on the international marketplace in competition with all other currencies. That is why the "value" of the dollar varies continuously. It, too, is simply a commodity, that is a price that has a supply and demand curve.

6. The technical and social division of labor entail the empirical validation of the existence of an Invisible Hand regulating the political economy. Classical economics assumes that each worker seeks a niche in work world suited to his talents. Since each person is unique, every job will have its requisite, qualified worker suiting his talents to piece work.

7. The culmination is Taylorism, assembly line mass production of goods and services. Again, from each worker following his egotistical interests, the public good emerges.

8. Conspicuous consumption is the motivation of the capitalist and the laborer, who belie the assumption that profits will be plowed back into the industrial infrastructure, to create a greater market until it is global in scope. People spend money redundantly to evidence their status in society.

9. A commodity is a produced artifact that takes on an aura of its own to haunt the consumer and producer. Money is a commodity. It “takes over” people’s lives like an addiction.

10. Keynesian economics holds that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability. For example, the government might applying creative budget deficits to stimulate production to get people employed.When an economy breaks down, the ethical duty of the state is to intervene and lower interest rates while increasing the money supply with the willingness to run a budget deficit indefinitely.

The Concept

Capitalism is the theory and practice of the mass production of goods and services through the instruments created by the factory and agrarian revolutions. In its last manifestation, information has become a commodity, too. Capitalism is a revolutionary force in technology and science that united the world by standardizing practices in the production of goods and services to allow mass consumption in a marketplace that is global to get the best possible price in optimum quantities. The pricing system rationalizes the distribution of scarce goods and services in their commodity form. Theoretically, capitalism is democratic because all people can be players in the marketplace. In practice, there are gross inequities in wealth, leading to the unfair allocation of incomes. It is a value judgment as to the assessment of what is unfair and what in political terms, such as taxes, can be done to redress wrongs. In the last instance, capitalism’s intrinsic systemic failure has been its inability to distribute its goods and services equitably. The state then must intervene; hence, there really is the primacy of the exercise of the political organs of government.