Milton Friedman wrote a book in the 1960's that explained the cause of the Great Depression. He argued that the Great Depression was caused by bad monetary policy. In other words. it was the result of government failure. There was no reason to believe that the Great Depression was caused by market failure. Friedman's argument was consistent with the neoliberal ideology that was gaining force withing the economics profession. Markets left to their own devices are self regulating. Government intervention into the market economy is the enemy that must be destroyed so that markets can work their magic.
Brad DeLong cites research which suggests that the Great Depression was not caused by government failure. It was the result of market failures. Credit channels had been disrupted and there was a steep decline in business investment and consumer spending. Fiscal policy, along with efforts to revive the credit channel, would have been the proper response to the Great Depression. That is, government interventions were required to address the failures of the market. DeLong argues, along with one of his colleagues, who refuted Friedman's explanation for the Great Depression, that we failed to provide the correct remedies to the Great Recession because of the dominance of Friedman's explanation for the Great Depression, along with neoliberal orthodoxy which holds that government failure is a bigger problem than market failure. Central banks have responded by increasing the monetary base, but that has not been an adequate response for an economy that suffers from weakened credit channels and weak aggregate demand.
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