Classical Theory of Employment · Part 2

or unemployment. . If there exist unutilized resources in the economy, it is profitable to employ them up to the point of full employment. This is true under the condition that factors are willing to accept rewards on a par with their productivity. . As automatic price mechanism operates in the economy, there is no need for government intervention. (However, J.M. Keynes emphasized the role of the State) . Interest flexibility brings about equality between saving and investment. . Money performs only the medium of exchange function in the economy, as people will not hold idle money. Criticisms of Say’s Law The following are the criticisms against Say’s law: . According to Keynes, supply does not create its demand. It is not applicable where demand does not increase as much as production increases. . Automatic adjustment process will not remove unemployment. Unemployment can be removed by increase in the rate of investment. . Money is not neutral. Individuals hold money for unforeseen contingencies while businessmen keep cash reserve for future activities. For the economy as a whole, therefore, total production equals total income”. Assumptions of the Say’s law of market The Say’s Law of market is based on the following assumptions: . No single buyer or seller of commodity or an input can affect price. . Full employment. . People are motivated by self interest and self – interest determines economic decisions. . The laissez faire policy is essential for an automatic and self adjusting process of full employment equilibrium. Market forces determine everything right. . There will be a perfect competition in labour and product market. . There is wage-price flexibility. . Money acts only as a medium of exchange. . Long - run analysis. . There is no possibility for over production or unemployment. . Unutilized resources used until they reach full employment. . No Government intervention; automatic Price adjustment mechanism operated.