The General Theory of Employment, Interest, and Money

Persistent Disequilibrium

The dominant economic thinking in 1936, referred to as “classical economics,” proved inadequate in explaining the 1930s Great Depression. Why did economies remain at low levels of output for so long while resources were lying idle? Why did the initial shock of the 1929 stock market crash cause such a prolonged slump?

The ideas of laissez-faire capitalism are central to classical economics, which assumes that markets left alone – to operate as free markets – always adjust to shocks by efficiently returning an economy to a situation in which it can employ and consume its maximum resources. But in fact, unregulated capitalism defies this assumption. A “general theory” could explain what drives changing output and employment levels in an economy as a whole and how economies function during crises and downturns.

Output and Employment

Economists use the concept of “aggregate demand” to designate economic output. Basically, aggregate demand comes from buyers spending their incomes on goods and services that they will enjoy immediately and in the future. The classical model assumes that people and organizations...