The classical economics emphasis on the free market system as the best suit for the Economy and view the economy as self adjusting meaning in any situation the market always has a way of readjusting itself because people always think about what they do and always act in their own best interests. That they always make decisions that are entirely logical based on the best available information. This has now been disproved. People often behave irrationally.
But during the great depression The crash of the stock market had a domino effect on the rest of the economy. As investors lost their fortunes, consumer confidence declined, and spending decreased.
This led to a decline in business activity, with companies reducing production and laying off workers.
As a result Unemployment skyrocketed, reaching as high as 25% in the United States at its peak, which further exacerbated the economic downturn.
There are different kinds of recession. But The Great Depression was a "demand-led one".
What that means is that people were buying less stuff. And normally When people stop buying stuff, business activity reduces, and business may reduce cost by reducing production and reducing workers.
Since people lost their Job people bought even less stuff and everything went worse.
The economy couldn't properly adjust, people might want to buy stuff, but they had no spare money, since there were not enough jobs to go around.
And businesses might have wanted to hire people, but nobody was buying their stuff and investors might want to invest but have no confidence.
John Maynard Keynes challenged the classical assumptions and Suggested that
Increasing Aggregate demand would boost the economy and end recession
The Classical school of thought assumed that people are rational but Keynesian assumed that during tough situations, people's confidence can reduce or collapse which could result in decline in the investment and demand.
Classical model generally termed as "laissez faire" where there is little need of the govt. intervention in the economy.
But, under the Keynesian model, the govt. intervention plays an important role in the economy especially in the situation of recession where there is a need for government spending to offset the fall in private sector investment.
