Classical Theory of Income and Employment

Classical Theory of Income and Employment

                   Most of classical theories were involved during the 18^th and 19^th centuries. Their main emphasis was on the laissez faire economy (free enterprise). However, by the year1936 a British economist, Mr. Keynes, wrote a book titled, “General Theory of Employment, Interest and Money”. in which he challenged the theories of the classical economists. Keynes justified the government intervention into the economic affairs as opposed to the classical economists. Keynes theory proved to be successful in bringing the world out of the great depression of 1930s. However now a day certain countries, particularly the United States of America, have decided to confine themselves to the classical theories and sought to revive them. They criticize Keynes theory by stating that the classical theories are more applicable under normal economic situations and that Keynes theory was only suitable for depression periods.

            The classical economists believe that there is always full employment of resources in the economy of a country, and hence there does not exist the problem of unemployment. The classical theory of full employment is based on says Law of Markets. We shall discuss this law before going into classical theory of income and employment.

SAY’S LAW OF MARKETS

            The simple statement of Says law is supply creates its own demand. According to this law whatever is produced in a free enterprise economy is automatically demand and over a long period of time when a supply of goods and services increases, the demand for them also increases automatically and vice versa. Hence there is no question of over production or under production and the economy remains at full employment all the time.

             With assumption of full employment J. B says notes down the market mechanism in the following ways: “When the producer has put the finishing hand to his product he is most anxious to sell it immediately test the value should vanish in his hands. Nor is he anxious to dispose off the money he may get for it, for the value of money is also perishable. But the only way of getting rid of money is the purchase of some product or other. Thus the mere circumstance of the creation of one product immediately opens a vent for other product”. Hence aggregate demand would be equal to aggregate supply which means that there cannot be general over-production and unemployment.

       Say’s law of markets has been interpreted by various economists as follows.

            According to Marshall “A man is devoted to the production of wealth from which he expects to drive the means of enjoyment in the future.” The above quotation simply means that a typical man produces for the sake of future consumption and that everybody’s consumption is commensurate with his own level of production. Hence this quotation shows that there is not going to be any over-production or unemployment.

            According to Mill, “All sellers are inevitably, and by the meaning of the word buyers. Could we suddenly double the production powers of the country we should double the supply of commodities in every market: but we should by the same stroke double the purchasing power, everybody would bring a double demand as well as double supply,”

              This quotation is a crystal clean explanation of “Supply creates its own demand” According to it if the productive resources of a country. i.e. land, labour, capital and organization are double production of goods and services and their supply would also be doubled. Consequently the aggregate demand of the people would be doubled because in the aggregate sense of the word the people of a country are themselves the producers as well as consumers. Thus from the above explanation, we finds the Say’s law of Markets can be explained both in a barber economy as well as in a monetary.