The Classical Theory, key to early capitalism, dominated the spectrum of economics. Prior to the 1930s and prior to the writings of Keynes, the prevalent view, as outlined in the Classical Theory, was that national income would always be at the full employment level. If unemployment existed, it would be a transient phenomenon since within the economic system there exist self-correcting properties that would being the economy back to full employment. This view was based on Say's Law - that any supply of goods must call forth its own demand, supply creates its own demand, and therefore aggregate spending must always equal aggregate production at the full employment level. One can easily see how this view would translate into disaster. Writing during the great depression, Keynes, an important economist, observed unemployment at very high levels, he also observed that unemployment was not a temporary phenomenon. Therefore, the Classical Theory, as supported by the Say's Law, was demolished. But, increasingly, some ideas of the Classical Theory have been brought back. The argument brought forth by many politicians is that if we were to have an across-the-board cut in salaries, unemployment would diminish. One can easily see how this is faulty to assume. By having such a cut in salaries, there would be a decrease in purchasing power. Thus, firms would see no reason to produce more, and no reason to hire more workers. However, if one firm decided to lower raises, it would create more employment opportunities. .
In conclusion, it is easily observable why the careful study of the Classical Theory can be applied to resolve issues in the present economy. .
