Case Studies
Men Out of Work (Says Law)
 Booms and busts. What makes the economy so unstable? Before WWI economists had no theory to explain the periodic downturns in the economy. Several theories were put forth.
Theory One was that the system is self-maintaining, self-correcting. In the early 20th century businessmen still clung to a theory called Says Law which said that when they produced a commodity they automatically created a demand for that product. But in early in 1914, it was obvious something was wrong. Unemployment was climbing, prices were falling and factories were closing. The slump had no apparent cause that was evident to the Wilson administration.
The prevailing point of view seemed to be that the business cycle was correcting an imbalance and that by intervening you might only make things worse.
Comment & Analysis by Richard Gill Using examples of bonnet production, Analyst Richard Gill explains the concept of Says Law, named after the 19th century French economist JB Say.
Say said that in total, supply always creates its own demand. Fluctuations in the economy were seen as temporary. |
The Triumph of Capitalism (Marx and Schumpeter)
 Karl Marx was the first economist to conceive of a self generated cycle in which good times produced eventual bad times and the bad times produced good times. During the times of economic depression, Marx’s followers were quick to point out the failure of Capitalism.
Where Karl Marx had looked at the bust side of the cycle and forecast destruction, Joseph Schumpeter looked at the boom side and called it regeneration. Capitalism was by its nature intrinsically dynamic. The essence of Capitalism was to invent, innovate, to risk.
Karl Marx saw economic fluctuations as increasing evidence of the failure of the system. Joseph Schumpeter saw these same business cycles as evidence of economic growth and the success of the system.
| Comment & Analysis by Richard Gill Analyst Richard Gill explains that both Karl Marx and Joseph Schumpeter differed from the classical economists who held that depressions were temporary and uncharacteristic. While Marx saw the laboring class suffering under the Capitalist system, Schumpeter saw that the laboring classes were actually the greatest beneficiaries of Capitalist mass production. |
The Great Depression
 President Herbert Hoover presided over the onset and first few years of the Great Depression, a period where the nouveau rich became poor and the poor became poorer.
Responding to the Great Depression, President Hoover depended of the advice held by both reputable economists and government officials at that time. That theory held that a hands off approach to the economy was the best medicine. Over and over again Hoover would say that "Recovery is just around the corner". And leading economists of the era believed that the price system would make the necessary adjustments. If things were going well people would make profits, and if they weren’t they wouldn’t make profits and that would help in the adjusting process.
As the 1920’s faded and with them the memories of prosperity, the 1930’s brought a growing awareness that there was a serious split between traditional economic theories and present economic reality At the same time, British economist John Maynard Keynes was building a theory that dealt with the total purchasing power of the economy, aggregate demand and asking whether this was in proper balance with aggregate supply. His answers transformed modern economics and pointed to a path out of the depression. For President Herbert Hoover, the theories of John Maynard Keynes would come too late and the fate of the country would now rest in the hands of a new President, Franklin Delano Roosevelt.
| Comment & Analysis by Richard Gill Richard Gill explains that Keynes idea was revolutionary for the times. What Keynes said was that if you had a fall in investment spending, this might not lead to a rise but a fall in consumption spending. Total demand – consumption demand plus investment demand – might fall. It even might be a multiplied fall once the process got started. |
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