John Maynard Keynes attacked the classical economic theory in his book The General Theory of Employment, Interest and Money, published in 1936. Summarize Keynes’ criticisms and explain why the timing of the book is so significant.

Question

What will be an ideal response?

Answer 1

In 1936 the United States was in the midst of the Great Depression, a prolonged and deep recession that featured very high unemployment. According to the classical school of thought, such a recession should not have occurred. Instead, wages and prices should have adjusted quickly to changes in supply and demand. In other words, market forces should have quickly eliminated problems with joblessness. According to Say’s law, prolonged unemployment is impossible in the long-run classical model. This “law” proved false during the Great Depression. Keynes argued that wages, prices, and interest rates are not completely and quickly flexible; thus, after a recession begins they do not fall quickly to a new equilibrium level consistent with full employment. Instead they are “sticky” and slow to adjust to economic changes. This prevents the market solution from working quickly enough to avert a prolonged recession.