The statement reflects a pivotal transformation in economic thought. Classical economics, grounded in Say’s Law (“supply creates its own demand”) and assuming flexible wages and prices, argued that economies naturally gravitate to full employment equilibrium. Any unemployment was viewed as temporary, voluntary, or frictional, since falling wages would restore employment and falling interest rates would stimulate investment. There was no scope for persistent involuntary unemployment.

The Great Depression of the 1930s shattered this view. Prolonged, high unemployment across advanced economies defied classical self-correction. Wages and prices proved rigid downward, and declining demand led not to recovery but to deeper contractions.

Into this intellectual vacuum stepped John Maynard Keynes. He rejected Say’s Law and argued that aggregate demand, not supply, determines output and employment in the short run. Keynes introduced the idea of underemployment equilibrium, where an economy can settle below full employment due to deficient demand. He highlighted the roles of the propensity to consume, the marginal efficiency of capital (investment demand), and liquidity preference (money demand) as key drivers of output and employment.

Keynes’s central insight was that even if prices were perfectly flexible, inadequate effective demand would discourage firms from expanding output or hiring workers. Thus, unemployment could persist indefinitely without government intervention.

Classical theory failed to explain or resolve the Depression, whereas Keynes’s framework justified active fiscal and monetary policies to manage demand and achieve full employment. While classical ideas retain relevance in long-run analysis, Keynes provided the foundation for modern macroeconomics and short-run stabilization policy.