[MUSIC] Classical economics has its roots in the free market writings of 18th century economists like Adam Smith, David Ricardo, and most importantly, Jean-Baptiste Say. These classical economists believed that the problems of recession and unemployment were a natural part of the business cycle, that they were self-correcting, and most importantly that there was no need for the government to intervene in the free market to correct them. [SOUND] Between 1850 and the 1920s, as the world continued its industrial revolution, nations around the globe experienced numerous recessions marked by periods of negative growth and even depressions marked by severe economic pull backs. However, after every bust in any given nation, the macroeconomy always bounced back exactly as the classical economists predicted. That was true until the classical economists met their match in the Great Depression of the 1930s. It was during this Great Depression that one economist, Britain's John Maynard Keynes, would walk onto the world stage with a revolutionary, and to many of his critics a profligate, approach to engineering economic recovery. John Maynard Keynes was by all accounts a genius who made millions as a stock market speculator. He was also a distinguished patron of the arts, a faculty member at Cambridge University, and a key appointee to the British Treasury. In 1936 with the global economy flat on its back, Keynes published The General Theory of Employment, Interest, and Money. In that book Keynes not only flatly rejected the classical notion of a self-correcting economy that would solve unemployment through adjustments in wages and prices. Keynes also made the strong case that under certain conditions a recessionary economy could easily fall into a deep downward spiral like the Great Depression rather than rebound naturally. To Keynes, patiently waiting for the eventual recovery was fruitless because as he would note in a now famous quote in the long run, we're all dead. Instead, the best way to get the economy moving again was to prime the economic pump with massive government expenditures. This was indeed economic heresy at the time and Keynes's early followers who abandoned the classical view would pay a very high price for their apostasy, as they would be branded socialists, or even communists, for advocating such an activist role for the central government. To his credit, Keynes stuck to his guns as the Depression wore on and his teachings gained more and more adherence. This was particularly true in the United States where Keynesian economics would became the unwritten foundation for President Franklin Delano Roosevelt's New Deal policies. To understand why Keynesian economists triumphed, at least during the Great Depression era, it is important to understand how the two major pillars of classical economics crumbled under the weight of Keynes's argument. These two pillars are Say's Law and the Quantity Theory of Money, and they are analyzed in our next two modules. [MUSIC]
