How macroeconomics began

Before the 1930s, economists followed the classical tradition. They believed markets sort themselves out: everyone who is ready to work at the going wage finds work, and factories run at full capacity.

Then came the Great Depression of 1929. Output and jobs collapsed across Europe and North America. In the USA, between 1929 and 1933, unemployment rose from about 3% to about 25%, and total output fell by about 33%. Millions wanted to work and could not find jobs, which the classical view could not explain.

The unemployment rate = people not working but looking for jobs ÷ people working or looking for jobs (the labour force). For example, if 400 people are in the labour force and 40 are looking for work, the rate is 10%.

In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money. It studied the economy as a whole: how total spending decides total output and employment. Macroeconomics as a separate subject was born from it.