Okay, in unit six, lesson two, we're going to continue to discuss the Great  Depression, but we also wanted to discuss how changes in technology might  have amplified the depression, okay? So negative growth in output from 1930 to 1933 was matched by negative growth in labor and technology, except for 1931.  The capital stock decrease from 1932 to 1935 reflecting meager investment  during this period. When the economy turned around in 1934, technology growth turned up as well. 

So as the economy improves, technology is going to grow as well, and probably  the efficiency of the technology will get better too. So imagine that the economy  experienced negative technology growth from 1929 to 1933. The reduced  productivity of firms leads to a decrease in demand for labor. 

So as firms become less productive, they don't need any more workers. So real  wages and employment decrease. So if there's not a high demand for labor,  then companies can pay whatever they want. 

If people need a job, all of the leverage is with the employer. So lower  productivity also means that firms did not think it was worthwhile to invest in  building new factories and buying new machinery. There's no need to grow. 

If you have no consumer base, if you have nobody buying your products, and  financial markets are in meltdown, nobody would want to expand their  operations in an economy like that because nobody would buy their excess  goods. So both labor and capital inputs into the production function declined.  Once technology growth resumed in 1934, the story was reversed. 

Labor and capital inputs increased and the economy began to grow again. In  this view, there was a substantial decline in the production capabilities of the  economy, leading to a negative growth in output, consumption, and investment.  The Great Depression, in this account, was driven by technological regress. 

So as many economists are skeptical of such an explanation of the Great  Depression, they have three criticisms. First, large-scale technological regress is difficult to believe on its face. Did people know an efficient way to manufacture  something in 1929 but then forget it in 1930? Probably not. 

Even remembering that technology includes social infrastructure, it is hard to  imagine any event that would cause a decrease of 3% or more in technology.  And if such an event did occur, we would surely know about it and be able to  

point to it and identify it. So second, the explanation claims that labor input  decreased because households saw lower real wages and voluntarily chose to 

consume leisure rather than work. 

By most measures, though, real wages increased. Moreover, it's difficult to  equate a 25% unemployment rate, not to mention all the stories about people  could not find work with the labor market in which households are simply moving along the labor supply curve. So households were moving along the labor  supply curve. 

We had the Great Depression. Technology to blame. So they don't find this  consistent with that story because the supply of labor did not equate to the  demand for the labor. 

Third, a prominent feature of the Great Depression is the decrease in the price  level that occurred from 1929 to 1933. 9%, so prices decreased by over 9% in  1931, 1932. However, reduction in a level of potential GDP would cause an  inward shift of market supply curves and thus an increase rather than a  decrease in prices. 

For most economists, the view of the Great Depression as a shift in technology  is not convincing. Something else must have been going on, and in particular,  the very high unemployment rate strongly suggests that labor markets were  malfunctioning. Thus, rather than reviewing the large decreases in output in  economies around the world as part of the normal functioning of supply and  demand in the economy, we should perhaps consider it as an evidence that  sometimes things can go badly wrong with the economy's self-correction  mechanisms. 

If we want to explain the Great Depression, we are then obliged, as were the  economies of that time, to find a new way of thinking about the economy. It was  an economist named John Maynard Keyes who provided such a new approach.  In so doing, he gave his name an entire branch of macroeconomic theory known as Keynesian economics. 

Potential output is the amount of real GDP an economy could produce if the  labor market is in equilibrium and capital goods are fully utilized. So if we have  an economy that can produce a labor market that's in equilibrium and capital  goods are being fully utilized, then we are fulfilling our maximum amount of  potential for the GDP. The labor force is in full capacity, whereas the capital  goods, plant, property, equipment, assets, cash, et cetera, are being fully  utilized. 

Therefore, we can have the maximum potential of output for the GDP. Large 

enough decreases of potential output through technological regress, et cetera,  could cause the large decrease in real GDP that occurred during the Great  Depression. A reduction in potential output would lead to a decrease in real  wages and an increase in the price level. 

Those implications are consistent with the fact of the Great Depression years.  Further, it is hard to understand how potential output could decrease by the  extent needed to match the decrease in real GDP during the Great Depression.  So finally, a 25% unemployment rate is not consistent with labor market  equilibrium. 

Obviously, that's a huge number, 25% unemployment, the quarter of your  population. Obviously, that's not consistent with the labor market equilibrium.  Equilibrium is going to show, labor market equilibrium will show the demand for  products and the supply of labor to meet that demand for those products. That's when labor market will be in equilibrium. 



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