classical theory
Classical theory of employment
The Full employment Model-
Some of the aspects of classical theory are more relevant to the conditions prevailing in the developing countries and this theory highlights those factors which govern income and employment in these countries.
While the Keynesian theory ------ the role of effective demand in the determination of income and employment.
Classical theory-----In a free-market economy there was sufficient demand for the output produced.
Classical theory of employment-
It is based on two basic notions-
Say’ Law-
According to the classical theory propounded by Ricardo and Adam smith , levels of income and employment are governed by fixed capital stock on the one hand and wage-goods fund on the other. It may be noted in the beginning that the classical theory believes in full employment or near full employment prevailing in the economy. This belief of existence of full employment based on say’s Law. Say’s law given by French economist J.B.Say.
According to say’s Law “ Supply creates its own Demand” This implies that every increase in production made possible by the increase in the productive capacity or the stock of fixed capital will be sold in the market and there will be no problem of lack of demand.
Therefore, Classical economists rule out the possibility of over production, and there is no problem in selling the output produced.
According to this law, greater production automatically leads to a greater money income which creates the market for the greater flow of goods produced.
Thus deficiency in demand being no problem, the process of capital accumulation and expansion of productive capacity will continue till all people are employed and there is no reason why the productive capacity created remains unutilized or underutilized.
According to this law, the income which is not spent on consumer goods and thus saved will be
The Full employment Model-
Some of the aspects of classical theory are more relevant to the conditions prevailing in the developing countries and this theory highlights those factors which govern income and employment in these countries.
While the Keynesian theory ------ the role of effective demand in the determination of income and employment.
Classical theory-----In a free-market economy there was sufficient demand for the output produced.
Classical theory of employment-
It is based on two basic notions-
Say’ Law-
According to the classical theory propounded by Ricardo and Adam smith , levels of income and employment are governed by fixed capital stock on the one hand and wage-goods fund on the other. It may be noted in the beginning that the classical theory believes in full employment or near full employment prevailing in the economy. This belief of existence of full employment based on say’s Law. Say’s law given by French economist J.B.Say.
According to say’s Law “ Supply creates its own Demand” This implies that every increase in production made possible by the increase in the productive capacity or the stock of fixed capital will be sold in the market and there will be no problem of lack of demand.
Therefore, Classical economists rule out the possibility of over production, and there is no problem in selling the output produced.
According to this law, greater production automatically leads to a greater money income which creates the market for the greater flow of goods produced.
Thus deficiency in demand being no problem, the process of capital accumulation and expansion of productive capacity will continue till all people are employed and there is no reason why the productive capacity created remains unutilized or underutilized.
According to this law, the income which is not spent on consumer goods and thus saved will be