Understanding the Mystery

First thing to understand is the mystery that was posed by the Great Depression and why Keynes had to rethink the economics. Keynes also argued before Great Depression that thing like Great Depression cannot happen just like Lucas claimed before Financial Crisis. Keynes also said that economy is in very good shape and crisis cannot happen to US economy because economists have good understanding of how economy works. The question is that what was the puzzle that Keynes tried to understand as Great Depression came. Actually there were two type of puzzle one is the natural that everyone can understand easily and other is theoretical one that wrong economic theories had to resolve. Economic theory puzzle is that there is supply and demand of labor and unemployment cannot exist because economy is always at its full employment level. It is because if there is unemployment and lot of people are willing to work then supply of labor will create its own demand according to Say’s law. Reason of this automatic removal of unemployment is that due to high supply of labor the wages of labor will go down until and supply equals the demand and unemployment is gone. Even now some economists believe in theory that there is no such as unemployment but there is voluntary unemployment because people do not want to work at going wage. In reality it is completely wrong because lot of people want to work at going wage and fallen wage do not wipeout unemployment. Keynes work is about solving this theoretical puzzle that why supply and demand forces did not work in the labor market.

Second is the natural puzzle that does not depend on economic theory. There was a period called the Roaring Twenties in which there was full employment and prosperity but suddenly when the banks failed and stock market crashed then millions of people got out of job. The same system which could function so beautifully well and just naturally everything collapsed and economy goes into depression for very long period of time. Now this was the natural puzzle that why the system does not work after 1929 which was working perfectly in early 1920’s.