1. The Keynesian Revolution
& the dominant view before Keynes’ General Theory

2. Dominant View before Keynes
A “free market system” has some powerful equilibrating forces
The economy is like a large sailboat with a deep and heavy keel
If it gets hit broadside with a wave, it go off-center but will right itself on its own
Is there a need for the government or central bank to correct periods of imbalance?

3. Say’s Law of Markets: Basis of the Pre-Keynesian View
Supply Creates its Own Demand
If Demand is shocked downward in one area, will other areas be dragged down as well? What will companies do if they have excess inventories?

4. Say’s Law: the equilibrating mechanism
Producers adjust prices faster than quantities produced
If demand drops in one sector, what will companies do to get rid of excess inventories?
If savings exceeds investment, what will happen to interest rates?
If there is high unemployment, will it last? What price will adjust?

5. Anomalies of Say’s Law (during the Great Depression)
Prices dropped dramatically, demand did not rise
Interest rates fell precipitously, investment did not increase
Wages fell, unemployment lines lengthened

6. Say’s Law vs Keynes’ Law
Supply Creates its own Demand
Prices are more flexible than Quantities
Demand creates Supply
Firms adjust quantities produced first