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
terms 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.

Says Law
Says 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 Says 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 Says 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. Says 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 Says Law
1. Keynes rejected the fundamental classical assumption of fullemployment equilibrium in the economy.
2. Keynes refuted Says 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.