CLASSICAL THEORY OF EMPLOYMENT

INTRODUCTION

• Classical theory of employment is a contribution of various classical and neo-classical economists like Adam Smith, Ricardo, J. B. Say, Karl Marx, Marshall, Pigou etc. Classical Theory of employment is based on Say’s law of Market and on the assumption of flexibility of wages, rate of interest and prices. According to Say’s Law of Markets, “Supply Creates Its Own Demand.”

ASSUMPTIONS

• Every man is rational who wants to get maximum satisfaction.• Economy is free from any kind of interference by the state.• There is perfect competition in product, labour and money market.• Economy is closed.• There is flexibility in wages, rate of interest and prices.• Technology is constant.• Money is only a medium of exchange.• The quantity of money is given.• There is a direct and proportional relation between money wage and real wage.• Total output of the economy is divided between consumption and investment

expenditure.• Labour is homogeneous.• Saving is equal to investment.• Law of diminishing marginal returns is applicable in agricultural sector.

Explanation of the Classical Theory of Employment:-

• According to classical economists full employment is a normal feature of capitalist economy in long run. If unemployment occurs in an economy that is for short time period because economic forces will adjust in such a way, that unemployment will remove classical theory of employment is based on two basic notions –

• Say’s Law of Market• Flexibility of Wages, Interest and Prices.

Criticism of Classical Theory of Employment

• It Ignores the Problems of Short Period• Laissez-Faire Policy-An unrealistic

Assumption• Saving is Income Elastic• Unrealistic Assumption of Perfect

Competition