What failure of classical economics did the Great Depression highlight?
1 Answer
The Great Depression discredited classical economics by casting a doubt on how the market was able to regulate the economy.
Explanation:
After 1929 a doubt was cast over the classical economic theory according to which government should not intervene in the economy. The 1929 crisis brought deflation,banks going bankrupt and massive unemployment with businesses shutting down in masses.
In 1936 John Maynard Keynes published the "General Theory", in this book he advocated a certain amount of state intervention to stimulate consumption. Transfering money from the wealthy to the poor was one of the main means to achieve that goal.
After WWII the Keynesian remedies were applied in the economy as the 1929 crisis had discredited classical liberalism. It was henceforth thought that market economy would bring instabilty and that government could stabilize the economy.
