Question

1. Why did economists fail to predict and explain the Great Depression?

2. How the Great Depression shaped the economic theory

Answer 1

The Great Depression was the worst downturn in the economic history which started in 1929. It begin when stock market crashed. Due to this Great Depression around 15 million Americans become unemployed.

There were many professions who failed to predict the financial crisis. Neither the Wall Street bankers nor the Federal Reserve was able to see it coming. But economist who was well equipped with all the information were not able to guess it will be coming. It’s not that the economist missed it, but they denied the fact that it will happen. According to Franklin Allen, that economist didn’t take the role of the banks into the account, they focused more on the producers and consumers of goods and services and gave very less importance to the banks.

And as we know that the crisis was created by the banks only as they created the risky products, as they encourage the consumer for excessive borrowing. Economist fails to notice the housing bubble.

2) The Great Depression created human suffering. The standard of living dropped drastically. The international gold standard ended. International trade also collapsed by 65%. It took almost 25 years for the stock market to fully recover from the situation. Along with the negative impact it does had some positive impact also. The USA established unemployment compensation and old- age and survivors insurance through the Social Security Act. The role of macroeconomic policies increases. The government regulations especially on financial markets increases.