The United States many other countries suffered from an economic disaster during the Great Depression (1992-33). Under the impact of this Depression unemployment problem became rampant, income of the people was very low and demand for goods was very small.
Goods could not be sold. Factories were closed. People roamed here and there in search of jobs. At this critical juncture John Maynard Keynes’ magnum opus ‘The General Theory of Employment, Interest and Money.’
(1936) saw light of the day. If offered an explanation to the questions: “why there is unemployment and what can be done to remove unemployment?” Prior to the publication of this pioneering book of Keynes, economists concentrated their attention almost exclusively on microeconomics.
Macroeconomics was clearly the junior partner. Those economists who wrote economics from David Ricardo up to the publication of Keynes’ “The General Theory” were called as the classical economists. Some of them were also called as the neo-classical economists.
Prominent among them were J.B. Say, J.S. Mill, Marshall, Edge worth and A.C. Pigou. They assumed that macroeconomic aggregates like total employment, output, and income and price level remain constant. They were primarily concerned with the distribution (or allocation) of output, income, employment and expenditure among various goods and services of individual industries and firms. Their major emphasis was on the determination of price of an individual commodity and output of an individual firm. Classical economists did not formulate a systematic theory of employment, income or output because they believed that the normal situation of an economy is the existence of full employment.
Any situation other than full employment was considered abnormal. If at any time there was not full employment, these were a tendency towards full employment. Classical belief of the existence of full employment was based upon Say’s law of markets. This law briefly states: ‘Supply creates its own demand’. It means that as soon as goods are produced these are sold.
Therefore, there is no question of overproduction, and producers do not have incentive to cut production and cut investment. Hence, there is no question of unemployment. Thus according to the classical economists an economy always achieves equilibrium at the level of full employment.