Classical Theory Of Employment 286w6e

The Classical Theory of Employment Introduction The term ‘classical economist’ was first used by Karl Marx to describe economic thought of Ricardo and his predecessors including Adam Smith. But by ‘classical economists’ Keynes meant the followers off David Ricardo including J.S.Mills, Alfred Marshall, and A.C.Pigou. The term ‘classical economics’, as used by Keynes, refers to the traditional or orthodox principles of economics which had come to be accepted, by and large, by the well-known English economists since the time of David Ricardo. They were so widely accepted ad well established for over more than a century that they were labelled as ‘classical’. Classical Theory of Employment In macro-economics, ‘income’ and ‘employment’ are interchangeable since in the short run national income depends on the total volume of employment or economic activity in the country. That is why ‘employment theory’ can also be known as ‘income theory’. The classical economist did not formulate any specific theory of employment as such. They only laid down certain principles. The classical theory assumes full employment without inflation. Given wageprice flexibility, there are automatic forces in the economic system that tends to maintain full employment and produce output at that level. Thus full employment is regarded as a normal situation and any change from this level is something abnormal which automatically tends toward full employment. The classical theory of output and employment is based on the following assumption: 1. 2. 3. 4. 5.

There is existence of full employment without inflation There is closed laissez faire capitalist economy; There is perfect competition in labour market Labour is homogeneous. Wages and prices are flexible.

Say’s Law Say’s law is the foundation of the classical economics. Assumption of full employment as normal condition is justified by classical economists by a law known as ‘Say’s law of Markets’. It was this law on the basis of which classical economists thought that general over-production and hence general unemployment were impossible.

NOTE:- Being a student and disciple of Marshall, Keynes had himself accepted and taught these classical principles. But he repudiated the doctrine of laissez faire which the classical economists strongly advocated.

Statement of the Law According to J.B.Say an early 19th century French economist, ‘supply creates its own demand’. In Say’s words: “It is production which creates market for goods; for selling is at the same time buying and more of production, more of creating demand for other goods. Every producer finds a buyer.” In other words, every supply of output creates an equivalent demand for output, so that there can never be a problem of general over-production. Say’s law, thus, denies the possibility of the deficiency of aggregate demand. It is thus production which creates market for goods; it is the cause and sole of demand. Ricardo, the chief among the classical economists, said: “No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity which may be useful to him or which contribute to future production. Suppose 1000 metres of cloth is produced. The value of cloth has been distributed in the form of wages, rent, interest and profit as reward to the participating factors of production. The purchasing power so generated will be spent either on purchasing the cloth or some other commodity. The circle of production as well as purchase goes on widening till the supply of no commodity remains unsold in the market. Criticism of Classical theory and Say’s Law 1. Keynes rejected the fundamental classical assumption of fullemployment equilibrium in the economy. 2. Keynes refuted Say’s law of market that supply always created its own demand. He maintained that all income earned by the factory owners would not be spent in by product which they helped to produce. A part of the earned income is saved. 3. Keynes did not agree with the classical view of the laissez faire policy.