Why did the Great Depression make economists question the classical tradition?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The classical view held that all willing workers find jobs, but the Depression showed long lasting unemployment
The Great Depression showed long lasting unemployment, which the classical tradition did not expect.
Option (1) The classical view held that the economy has four sectors, but the Depression hit only one sector — Incorrect. The Depression cut output and employment across whole economies.
Option (2) The classical view held that all willing workers find jobs, but the Depression showed long lasting unemployment — Correct. US unemployment rose to 25 per cent.
Option (3) The classical view held that markets cannot exist, but markets kept working in the Depression — Incorrect. The classical view did not deny markets.
Option (4) The classical view held that outputs of all goods move together, but in the Depression they moved apart — Incorrect. Outputs moving together is a general observation, not the classical claim.
NCERT (2026-27): “1.1 Emergence of Macroeconomics … The dominant thinking in economics before Keynes was that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity. This school of thought is known as the classical tradition.” “However, the Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. … In USA, from 1929 to 1933, unemployment rate rose from 3 per cent to 25 per cent … These events made economists think about the functioning of the economy in a new way. The fact that the economy may have long lasting unemployment had to be theorised about and explained. Keynes’ book was an attempt in this direction. …” |