CHAPTER 5: OUTPUT-EMPLOYMENT THEORIES (CLASSICAL AND
5.1 Classical Theory
(A) Introduction: Employment and output analysis
at macro level has become an important part of economic theory only during
and after the Second World War period. It was J. M. Keynes who first analyzed
the frequent problem of unemployment and fluctuating levels of real output
or national income. Before Keynes’ General Theory (1936) there
was hardly any important and serious discussion of the problem of unemployment.
However, some underlying issues were discussed by the classical economists.
The classical school between 1770 to 1870 mainly includes such leading
economists as Adam Smith, David Ricardo, J.B. Say, John Stuart Mill and
Karl Marx. The later neo-classical economists like Alfred Marshall (between
1870 to 1930) had hardly anything to add to the classical theory. Professor
A. C. Pigou, the contemporary of Keynes strongly justified classical approach
and was critical of Keynes’ new theory. Keynes therefore has regarded
all of his predecessors as classical economists in this context. The classical
theory is based on the automatic self equilibrating tendency of
the economic forces.
(B) Say’s Law: The classical theory of employment
rules out the possibility of any general and prolonged unemployment. The
classical employment analysis is based on the Market Law of the
French economist J. B. Say. The law is simply a description of market
exchange activity: "Supply creates its own demand." This apparently
simple statement has serious implications. Usually, for an individual
good of a smaller seller this statement appears to be a truism.
Such a businessman would make suitable adjustments in the price he charges
and would clear the market for the supply that he intends to make. If
on a particular day he observes that his supply is exceeding demand, then
assuming that the good he supplies is extremely perishable (the supply
of which cannot be withdrawn or postponed), he will lower the price somewhat
and thus create sufficient demand for it. So far so good. However, it
is important to remember the classical economists and Say’s Law were
concerned not with a single good and a single supplier of it. The law
is a generalization at the macro-level where all varieties of goods and
services are supplied. This law in particular meets with serious limitations
when an attempt is made to make it applicable to the labor market and
to the conditions of employment level.
2 Keynes' Employment Theory
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