First Crisis

Macroeconomic theory was created by the Great Depression. This event was not forecasted by economists at that time and nobody could understand it. Leading economists of the time said this is not a serious thing and this recession will recover very quickly but it didn’t happen because the theories were wrong. According to the theories the labor market will automatically will find equilibrium so there can be no unemployment because if there is access unemployment then wages will go down and supply will go down $ demand will rise and unemployment will eliminate. But it didn’t happen for more than fifteen years there was large unemployment, starvation, hunger and social destruction of all kinds. But economists kept waiting for the market mechanism to work but it didn’t.

At that time Keynes repealed the law of supply and demand in the labor market and said that supply and demand does not work in labor market. If it does not work in labor market then its working in other markets also become suspicious. But this is all hidden up and not clearly mentioned in the text books that this is what the Keynesian theory says. So, supply and demand does not work in labor market so government has to come in to reduce the unemployment.