It is a fundamental assumption of economics that economics is about using markets to allocate scarce resources. This fundamental assumption is very deficient. There is only one primary resource of economic interest — human labor — and that resource has since the beginning of the 19th century been in surplus, not scarcity. Every physical resource, from gold to guns to oil, can be increased mostly without limit by allocating more labor to its production or extraction.
Take oil, for example. Oil is just a means to an end, actually a means to a means to a few ends: Oil is energy, and we use energy to a) power industrial production and b) provide personal transportation. There is, according to Scientific American, about an order of magnitude more energy available in wind and solar power than we would expect to use given pre-depression rates of economic growth for the next fifty years. It will, however, require vast amounts of human labor to build the equipment and infrastructure necessary to capture and distribute this energy. But so what? Right now about one person in six in the most highly industrialized and productive country in the world is un- or under-employed. If there's one thing we have plenty of, it's human labor.
Each and every capitalist economic crisis since the middle of the 19th century has been a failure not of supply but of demand. There has never been a capitalist crisis caused by not producing enough stuff; all capitalists crises are at root caused by not demanding the stuff that we have or can produce.
But what precisely is "demand"?
Demand has two components: what people want and need, and what they "deserve" to have. No matter how much a minimum-wage worker, for example, wants a Ferrari, he cannot demand one. Want and need is more-or-less directly real, actual measurable properties of real human beings. The second, however, is entirely socially constructed; what people "deserve" to have is neither a property of the objective (non-minded) physical world, nor a property of individual human beings. What people "deserve" can be found only in the agreements and social constructions between multiple human beings.
Thus, there are two ways we can have a failure of demand. First, we might be producing things that people simply do not want, or do not want sufficiently to directly or indirectly allocate the labor required for their production. If it takes one hour to produce a shoe, and we are producing so many shoes that people do not want to spend an hour of their labor producing (or earning the money to buy), then we can say that the demand for that many shoes has failed, and we should therefore reduce the supply.
Capitalism, however, handles this sort of "real" demand failure relatively gracefully. The problem comes when the socially constructed form of demand, what people "deserve" to have.
The market for labor is the market for labor power, the ability to produce labor. The cost of labor power is the labor required to provide the worker with the necessities for his or her productivity. The marginal value is the additional productivity generated by the increase in cost. That increasing the cost of labor power produces a greater increase in amount, intensity or quality of labor worked constitutes the natural or ineluctable demand of labor.
But what about the surplus value of labor? The profitability of employing labor is precisely in the difference between the cost of labor power and the amount of labor produced. Under laissez faire capitalism, the worker has no socially constructed demand on his own surplus labor. The only socially constructed demand for this labor, the only people who "deserve" this labor, are the owners of capital, who extract this labor as economic rent.
In the 18th and early 19th century, capitalism got a "jump start" because there was tremendous scope for making workers more productive, which (to some extent) improved the subjective quality of life for many workers. The natural demand of workers in addition to the increased demand of the capitalist class created a direct economic incentive to dramatically increase economic production.
The fundamental purpose of New-Deal consumer capitalism and Keynes' General Theory was to "artificially" increase the demand of workers above and beyond that necessary to create their productivity, to socially construct the idea that workers deserved to themselves consume at least some of their surplus labor. For a lot of interesting reasons (which I'll talk about soon), there has been strong dialectical material and social-evolutionary forces which have eroded this social construction.
The present economic depression is no different: the fundamental problem is failure of demand, mostly the demand of the working class and professional-managerial middle class. The steps are simple. First, in the 1990s and early 2000s, demand was socially constructed to derive from rising asset prices (mostly homes) rather than wage income. Furthermore, these rising asset prices were not caused by either increased cost or increased use-value, but were themselves socially constructed. However, these socially constructed rising asset prices were not at all subject to social control or management, not even the minimal social control provided by the capitalist class. It eventually became impossible to ignore that these rising asset prices were neither based in reality nor intentionally and socially managed, and they collapsed.
Second, internal competition within the capitalist class took the form of financial manipulation — mostly Credit Default Swaps and Collateralized Debt Obligations — which created money out of at best nothing and at worst outright lies and fraud. It again eventually became impossible to ignore the lack of actual foundation in reality or intentional social construction for these financial manipulations.
What happened when asset prices and financial bullshit collapsed? People's wants and needs didn't change. The labor available to supply these wants and needs didn't go away. The capital equipment to amplify people's labor is still there. What changed was the socially constructed sense of what people deserve to have, to convert their wants and needs into demand. People don't "deserve" stuff and cannot therefore demand it. Capitalists therefore produce less stuff, and use less labor, causing unemployment and falling wages. Unemployment and falling wages further decrease socially constructed demand: a person with no job does not "deserve" even to live, much less consume any luxury good. Demand and supply are thus locked into a positive feedback loop of decreasing production and consumption, more colloquially known as a "death spiral".
It's critically importance to understand that the reduced consumption and production is absolutely not caused by there being less stuff to consume or by increased true cost of production. It's caused, paradoxically, by there being too much stuff to consume: so much stuff that the capitalist class cannot earn increasing profit on increasing its production.
Of course, this death spiral is extremely bad for the working class and for all but the most elevated (or specialized) levels of the professional-managerial middle class. But it's also bad for many in the capitalist class, perhaps even a majority of them: you cannot appropriate and exploit the surplus value of an unemployed worker. A large number of people at the "bottom" of the capitalist class are being pushed to the upper professional-managerial middle class, and many of them will descend further into the lower middle class or the unemployed class.
The present financial crisis (as well as the Great Depression) is a classic case of the Prisoner's Dilemma writ large. Although it is in the mutual interest of those in the capitalist, middle and working classes to mutually cooperate to maintain consumer capitalism, capitalism has grossly deficient social mechanisms for suppressing individual self-interest in asymmetric betrayal, eventually causing people to choose the "rational" Nash equilibrium of mutual betrayal and the collapse of consumer capitalism.