At the onset of the Depression the dominant view among mainstream economists in the U.S. was that the initial downturn of investment and output was a more-or-less normal cyclical phenomenon and that recovery would inevitably follow. Economists disagreed about the proper monetary, wage and price policies for facilitating recovery; but the idea that this recovery might fail to lower unemployment below catastrophically-high levels did not initially enter the heads of mainstream economists. The Depression and associated policy issues were initially viewed in short-run cyclical context rather than as connoting any long-run barrier to a full recovery of investment.
As the economy collapsed and the decade wore on without approaching a full recovery, "the focus of economic interpretation inevitably moved away from the analysis of the boom and bust of 1921-1933 and toward the specific problems of the 1930's, viewed as a new age of depression". This first involved eclectic analyses speculating that the severity of the downturn might have been due to the previously undetected seriousness of financial and sectoral imbalances built-up during the 1920s boom. Some such analyses implied that for a full recovery to occur in the near future, the state might "have to arrogate large new functions in support of economic balance". However as long as the weak recovery that began in 1933 continued and the prior focus of theory on short-run cyclical fluctuations around a full-employment growth path was not fundamentally questioned, the prospects for a real revolution in theory and policy were quite dim. It was in the years 1936-38 that two events combined to shake up and recast the whole debate within mainstream macroeconomics: Keynes' General Theory and the renewed economic collapse of 1937-38.
Keynes expressed his analysis m terms of a short-run equilibrium model of a competitive capitalist economy, which was crucial because given the dominant orthodoxy, until Keynes had made his system in traditional short-term equilibrium form, economists . . .
