Economics presentation
The Great depression & say’s law
Name: Fawad Ali
Roll no: 19s-MBA-NBS-10
Date: 19-11-2019
The great depression
The Great Depression was the worst economic
downturn in US history.
lasting from 1929 to 1939.
It began after the stock market crash of October
1929, which sent Wall Street into a panic and
wiped out millions of investors.
Over the next several years, consumer spending and
investment dropped, causing sharp declines in industrial
output and employment as failing companies laid off
workers.
By 1933, when the Great Depression reached its lowest
point, some 15 million Americans were unemployed and
nearly half the country’s banks had failed.
By 1933, unemployment was at 25 percent and more
than 5,000 banks had gone out of business.
What Caused the Great
Depression?
1. Stock Market Crash of 1929.
2. Bank Failures.
3. Reduction in Purchasing Across the Board.
4. American Economic Policy with Europe.
Stock market crash
Throughout the 1920s, the U.S. economy
expanded rapidly, and the nation’s total wealth
more than doubled between 1920 and 1929, a
period dubbed
“the Roaring Twenties.”
rapid expansion of stock
market
People invested their all savings in stock market
Stock prices had risen more than fourfold from
the low in 1921 to the peak in 1929.
As stock prices rose to unmatched levels,
investing in the stock market came to be seen
as an easy way to make money, and even
people of ordinary means used much of their
disposable income or even mortgaged their
homes to buy stock.
The American economy entered an ordinary
recession during the summer of 1929, as
consumer spending dropped and unsold goods
began to pile up, slowing production. At the
same time, stock prices continued to rise, and
by the fall of that year had reached levels that
could not be justified by anticipated future
earnings.
On October 24, 1929, the stock market bubble finally burst, as
investors began dumping shares
A record 12.9 million shares were traded that day, known as “Black
Thursday.” later on “Black Tuesday” some 16 million shares were
traded.
Millions of shares ended up worthless, and those investors who had
bought stocks “on margin” (with borrowed money) were wiped out
completely.
As consumer confidence vanished in the wake of the stock market crash,
the downturn in spending and investment led factories and other
businesses to slow down production and construction and begin firing
their workers. For those who were lucky enough to remain employed,
wages fell and buying power decreased. Many Americans forced to buy
on credit fell into debt.
Bank Failures
Throughout the 1930s over 9,000 banks failed.
Bank deposits were uninsured and thus as banks
failed people simply lost their savings.
Surviving banks, unsure of the economic situation
and concerned for their own survival, stopped
being as willing to create new loans.
Reduction in Purchasing Across the Board
With the stock market crash and the fears of further
economic woes, individuals from all classes stopped
purchasing items. This then led to a reduction in the
number of items produced and thus a reduction in the
workforce. As people lost their jobs, they were unable to
keep up with paying for items they had bought through
installment plans and their items were repossessed.
The unemployment rate rose above 25% which meant, of
course, even less spending to help alleviate the economic
situation.
American Economic Policy with Europe
As businesses began failing, the government created the
Smoot-Hawley Tariff in 1930 to help protect American
companies. This charged a high tax for imports thereby
leading to less trade between America and foreign
countries along with some economic retaliation.
Say’s Law
Say’s law of markets is the core of the
classical theory of employment.
An early 19th century French Economist, J.B.
Say, expressed that “supply creates its own
demand.”
Therefore, there cannot be general
overproduction and the problem of
unemployment in the economy.
People are paid to create goods and/or services, and
can then spend that money on other goods/services.
And there’s no point in holding onto money for long
periods without spending it, because then its value is
likely to decrease with inflation.
So anytime goods are manufactured or services are
rendered, people are paid money, which leads to greater
demand. Thus, aggregate production level leads to equal
aggregate demand.
Assumptions & implications
Full Employment in the Economy:
The law is based on the proposition that there is full employment in the
economy. Increase in production means more employment to the factors
of production. Production continues to increase until the level of full
employment is reached. Under such a situation, the level of production
will be maximum.
Proper Utilization of Resources:
If there is full employment in the economy, idle resources will be
properly utilized which will further help to produce more and also
generate more income.
Perfect Competition:
Say’s law of market is based on the proposition of perfect competition
in labor and product markets.
Automatic Adjustment Mechanism:
The law is based on this proposition that there is automatic and self-
adjusting mechanism in different markets. Disequilibrium in any market is
a temporary situation. For example, in capital market, the equality between
saving and investment is maintained by the rate of interest while in the
labor market the adjustment between demand and supply of labor is
maintained by the wage rate.
Role of Money as Neutral:
The law is based on the proposition of a barter system where goods are
exchanged for goods. But it is also assumed that the role of money is
neutral. Money does not affect the production process.
Saving as a Social Virtue:
All factor income is spent in buying goods which they help to
produce. Whatever is saved is automatically invested for further
production. In other words, saving is a social virtue.
Criticisms of Say’s Law:
J.M. Keynes in his General Theory made a frontal attack on
the classical postulates and Say’s law of markets.
Supply does not create its Demand:
Say’s law assumes that production creates market (demand) for goods.
Therefore, supply creates its own demand. But this proposition is not
applicable to modern economies where demand does not increase as much
as production increases. It is also not possible to consume only those goods
which are produced within the economy.
Self-adjustment not Possible:
According to Say’s law, full-employment is maintained by an automatic
and self-adjustment mechanism in the long run. But Keynes had no
patience to wait for the long period for he believed that “In the long-run we
are all dead.” It is not the automatic adjustment process which removes
unemployment. But unemployment can be removed by increase in the rate
of investment.
Money is not Neutral:
Say’s law of markets is based on a barter system and ignores the role of
money in the system. Say believes that money does not affect the economic
activities of the markets. On the other hand, Keynes has given due
importance to money. He regards money as a medium of exchange. Money
is held for income and business motives. Individuals hold money for
unforeseen contingencies while businessmen keep cash in reserve for future
activities.
Over Production is Possible:
Say’s law is based on the proposition that supply creates its own demand
and there cannot be general over-production. But Keynes does not agree
with this proposition. According to him, all income accruing to factors of
production is not spent but some fraction out of it is saved which is not
automatically invested. Therefore, saving and investment are always not
equal and it becomes the problem of overproduction and unemployment.
Thank you
