This presentation gives a brief knowledge about great depression of 1930's and difference in view point of classical theory and Keynesian theory.

1. Prepared by:
Nitin Narang

2. Economists Marshall, Smith, Pigou believed in the
existence of full employment in the Laissez faire economy.
They believed that there was a self adjustment system in the
economy. But this theory didn’t showed at the time of
Great Depression. This theory was criticized by Keynes.
Keynes then said that role of government is important in the
recovery from depression.

3. • Given by Adam Smith, Marshall and Pigou.
• Believed in existence of full employment in the economy and
considered it as a normal situation.
• Existence of automatic adjustment mechanism in the economy.
• Wages, prices and ROI were assumed as flexible

4. Cut Wage
Rate
Reduction in
Cost
Prices will
fall
Increased
Demand
More
Employment
Full
Employment
Equilibrium

5. • Higher wages will lead to more supply
of labour but less demand of it, so wage
prices will fall to establish equilibrium.
• Lower wages will lead to less supply
of labour but more demand of it, so
wage price will rise to establish
equilibrium.

6. S= f(r)
I= f(1/r)
S=I
Equilibrium occurs when,
Savings = Investment

7. • Based on quantity theory
of money.
• Higher price level in the
market indicates higher
money supply.
• P = f(M)

8. • Failed during the Great Depression of 1930’s.
• Self Adjustment was not possible
• State intervention was necessary.
• Underemployment equilibrium was possible.

9. • Great Depression caused lack of consumption and
AD decreased.
• Investment also didn’t increased due fear of losses.
• Self adjusting mechanism failed .
• Keynes said that government intervention is
necessary.
• He also stated that underemployment equilibrium
also occurs.

10. • In short period, level of national income is determined
by aggregate demand and aggregate supply.
• Equilibrium is established when,
AD = AS

11. According to Keynes, equilibrium
could be established at
underemployment as well when,
AD = AS.
Equilibrium could be established
when the demand is not at its peak
and still more employment could be
generated.

12. • Ignorance of long run equilibrium.
• Perfect competition unrealistic.
• Role of government as an investor is considered. But
as a spender and taxer it is ignored.
• It is economics of depression only.
• There is time lag.

13. CLASSICAL KEYNES
Full employment is a normal
situation
Full employment unrealistic
Laissez-faire economy. Government intervention is
required.
Automatic self adjusting system. Denied self adjusting system.
Full employment equilibrium. Under-employment equilibrium
Money is only medium of
exchange.
Money is a medium of exchange
and acts as a store of value as well.