One of Keynes’s core insights is that aggregate demand—not just the forces of supply—drives overall economic activity. Previously, classical economists maintained that markets would naturally correct themselves through price and wage flexibility, ensuring full employment. Keynes counters this by demonstrating how insufficient aggregate demand can result in prolonged underemployment, as businesses scale back production if they do not foresee robust consumer spending: “Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised” (14). By pinpointing this “intersection,” he underscores that demand conditions, rather than any automatic market mechanism, determine whether firms hire new workers.

Central to Keynes’s perspective is the idea that nominal wage cuts do not necessarily induce full employment, because they can further reduce aggregate demand. If workers earn less, their purchasing power diminishes, leading to lower consumption. In turn, businesses may respond by cutting investments, thus perpetuating a downward spiral. The failure of wage reductions to stimulate economic recovery during the Great Depression offered historical support for Keynes’s theoretical stance, revealing that private markets alone cannot be relied upon to rebound quickly from severe downturns.