Classical Theory of Employment

Classical Theory of Employment There was no single theory which could be labeled as classical theory of employment. The classical theory of employment is composed of different views of classical economists on the issue of income and employment in the economy. Adam smith wrote the book “An Enquiry into the Nature and Causes of the Wealth of Nations’ in . Since the publication of this book, classical theory was developed by David Ricardo, J.S.Mill, J.B.Say and A.C.Pigou. Classical economists assumed that the economy operates at the level of full employment without inflation in the long period. They also assumed that wages and prices of goods were flexible and the competitive market existed in the economy (laissez-faire economy). . . Say’s Law of Market Say’s law of markets is the core of the classical theory of employment. J.B.Say ( – ) was a French Economist and industrialist. He was influenced by the writings of Adam Smith and David Ricardo. J.B.Say J.B. Say enunciated the proposition that “Supply creates its own demand”. Hence there cannot be general over production or the problem of unemployment in the economy. According to Say, “When goods are produced by firms in the economy, they pay reward to the factors of production. The households after receiving rewards of the factors of production spend the amount on the purchase of goods and services produced by them. Therefore, each product produced in the economy creates demand equal to its value in the market. In short, this classical theory explains that “A person receives his income from production which is spent on the purchase of goods and services produced by others. D e m a n d f o r g o o d a n d s e r v i c e s S u p p l y of g o o d a n d s e r v i c e s Income Output - - Theories of Employment and Income . Interest rate flexibility leads to saving – Investment equality Implications of Say’s Law . There is no possibility for over production