Barkley, please correct me if I have taken the comment below out of
context. To me, it seems to show exactly what is wrong with using the
AS-AD framework to help describe the great depression. If one begins
with the financial collapse instead of with the deficiency of AD, one is
not led to raises the question of what the government can do to raise
AD. One is led to a more detailed analysis of what causes financial
collapses. This, it seems to me, is exactly where one who aims to
comprehend the cause of the great depression ought to be led. (I would
refer you again to the Mundell address.) Unfortunately, for teachers of
economics principles who use the typical textbook, to follow this route
is unrewarding. A large part of the reason for this is another myth. It
is that an astute legislature, informed by knowledgeable economists,
created the central bank in order to avoid financial collapses.
As I see it, the textbooks have perpetuated both of these myths. In
doing so, their writers have made a good living and unimaginative
teachers and their students have had an easier life. At the same time,
students were enticed to develop a predisposition to think that
economists have been helpful in producing an enlightened macroeconomic
policy and that democratic governments have, more often than not,
followed the economists' advice.
To claim that economics can explain the great depression is an excellent
way to stimulate student interest. But do you think that support this
claim with myths is a worthwhile long run goal?
Barkley Rosser wrote:
> Now, I have discussed above how financial collapses can easily be
> analyzed as a source of collapsing aggregate demand as businesses fail
> to carry out real capital investments, which then, well, I shall not
> repeat what I said above.
Pat Gunning
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