CRITICISM ON THE CLASSICAL THEORY OF FULL EMPLOYMENT

CRITICISM ON THE CLASSICAL THEORY OF FULL EMPLOYMENT

1.                 According to the classical economists the method of overcoming the problem of unemployment is the cutting down of competitive wage rate as explained in the Marginal Productivity theory. However, such a solution is not applicable in practice particularly in the third world countries where the supply of labour exceeds the demand for it but labourers are already living at low subsistence level. Thus as a result of cutting down the wage rate they would eventually be led to starvation. This would lead to the creation of a new problem instead of solving the problem of unemployment moreover in this age of democracy labourers cannot really tolerate such a low wage rate and would express their grievance through trade unions, strikes, etc.

2.             This theory represents the working of a laissez faire economy which fluctuates through changes in the forces of demand and supply. This means that it is rather impossible to achieve a stable equilibrium at full employment level in such an economy. Therefore the problem of unemployment will surely exist to a certain extent in a laissez faire economy. It appears that this theory is more applicable in a socialist economy where the government attains full control of the whole economic system and can therefore cut the wage rate so as to maintain full employment.

3.               The classical theory of full employment only takes into account the demand for labour as indicated by the MRP curve and it totally ignores its supply whereas in reality wage rate is determined through the interaction of forces of demand and supply.

4.                According to Keynes the policy of cutting down wage rate would aggravate the problem of unemployment rather than achieving full employment. Keynes arguments are that the wage rate aggregate demand for goods and services would fall. Production would also fall and eventually firms would close down as a result of a fall in the level of investment. This according to Keynes more unemployment will take place as a result of cutting down of the wage rate.

5.                Furthermore Keynes says that unemployment in a laissez faire economy is not something to worry about but it is in fact an inevitable phenomenon simply because the level of employment depend upon the effective demand which in turn relies upon the level of investment. Similarly the level of investment mainly depend upon future business expectations and if at any time these expectations indicate a bleak future, the level of investment would naturally fall and this unemployment takes place.

6.                Keynes challenged the assumption of interest elasticity of aggregate saving and investment functions. He says that it is the national income and not the rate of interest which bring equilibrium between saving and investment. According to him when investment goes up the level of income goes up and consequently. Saving goes up to become equal to higher level of investment.

7.              Classical economists assume that there is perfect competition in the product and factor markets. This is not realistic because in the modern capitalist economies there is strong tendency towards the establishment of monopolies. This hinders the working of free forces of demand and supply in the product and markets.

8.             Keynes points out that laissez faire economy has a natural tendency to fall into a slump and this situation can be remedied only through state intervention in the form of public investment and other fiscal measures. This Keynes justifies state intervention in clear contraction to the concept of free enterprise economy presented by the classical economists.

9.                 Evidently we gather from the theory that classical economists were against labour laws, minimum wage legislation, the concept of collective bargaining, unemployment allowances, etc. However nowadays the negation of such practices would be considered unjust and against morality. Moreover cutting down the wage rate would retard growth rate of the economy because a reasonable wage rate always act as an incentive to stimulate production.

10.         Last but not the least practical experience shows that there has massive unemployment in the past in advanced countries. Following are the evidence which establish the existence of unemployment in these countries.

a)              During the Second World War the United Kingdom had suffered greatly by unemployment as the rate of unemployment in the country at that time varied from 10% to 22%.

b)            During the year 1932-37 the level of unemployment in the United States of America was 15 million. In spite of the application of economics policies the level of unemployment could not be reduced to less than 7.5 million in 1937. Thus this clearly point out that the theory of full employment was just imaginary.

c)              Finally during the period of the great depression, i. e in the early 1930’s. There was massive unemployment throughout the world and the reality of this phenomenon establishes a notion against the concept of full employment.