Traditional Theories for Calculating Output and Unemployment
Unemployment is a major problem affecting the world economy. Many theories have been devised to explain how to control unemployment and increase output. In classical theory, output and unemployment are determined.
The presumption is that people are intelligent, self-interested beings.
Both the factor market and the product market are subject to perfect competition.
People are not affected by the illusion of wealth.
Laisses - fair conditions prevail, which means that the government doesn't meddle with business affairs.
There is a closed economy with no connections to the rest of the world.
Organizational structures and production methods remain constant.
Money is only a medium of exchange.
Prices and wages are movable both up and down.
The labor force is evenly distributed.
The economy is experiencing full employment.
It presupposes the long term.
Some employees might be asked to leave their positions if the economy experiences widespread overproduction over a brief period.
In the short term, employment is a concern. The economy will naturally move toward full employment over the long term.
There is therefore no chance of unemployment and overproduction in the economy in the long run.
There are three types of markets according to classical economists.
- Employment market
- Goods market
- Money market
Say's Law of Market, developed by French economist J.B. Say, is based on this principle.
The J.B. Say law has received support from classical economists including J.S. Mill, Marshal, Pigu, etc.
It is known as the classical theory of employment since it was developed by classical economists.
Traditional economists believed that a free market economy would have full employment.
In their opinion, under a situation of perfect competition, involuntary unemployment would only last a short while before going away.
Even if full employment is not achieved right away, this will eventually lead to it.
In a scenario of full employment, certain sorts of unemployment may exist.
Inability to find employment voluntarily
Changes in employment are linked to frictional unemployment in a booming economy.
Structural unemployment is a result of a particular industry's protracted decline.
Microeconomics makes up the bulk of traditional economic theory.
There is no government intervention in the economy; demand and supply drive the economy instead.
Only in the 1930s did full-fledged macroeconomics begin to emerge.
The quantity theory of money and Say's Law of the Market are two fundamental tenets of classical theory.
Markets Law by Say (Foundation of the traditional employment hypothesis.)
The formal adage "Supply generates its own demand" was coined by renowned French economist Jeanie Baptiste Say.
He asserts that "the market produces its own demand." Employees who are compensated by a producer to produce a good then go out and buy it from other buyers. Thus, demand is influenced by supply.
Overproduction and unemployment are not possible in the economy.
Even if there is some short-term unemployment, the economy will eventually move toward full employment.
Say's Law of Market Hypothesis
- This law is true for both the barter and monetary systems.
- An economy based on free markets exists.
- Validity of the long-term,
- Best possible resource allocation,
- No government involvement
- The market's size is adaptable enough for growth.
- Only as a means of exchange can the money be used.
- No rational thinker keeps idle money.
- Spending is equivalent to income.
- There is a closed economy with no connections to the rest of the world.
- Markets for factors and products both exhibit perfect competition.
- Self-interest drives people since they are logical beings.
- There is no leakage in the income cycle between the various economic sectors.
- Due to the flexibility of salaries, interest rates, and prices, the economic system automatically adjusts.
- Investment is equal to saving.
Effects of Say's Law
Full employment is because of an increase in production.
Full employment is possible because of the proper utilization of resources.
There is no overproduction.
Say's the law states that the self-adjustment mechanism creates equilibrium in many markets. Disequilibrium is a temporary situation. The flexible interest rate helps to reestablish equality between saving and investing in the capital market, whereas the wage rate helps to preserve it in the labor market.
Reduced wages lead to full employment This law makes the assumption that wage reductions, which lower production costs and prices while raising demand for commodities, aid in the restoration of full employment. It refutes the economic policy of wage rigidity.
Money's impartial legislation is based on a barter system in which products are traded for one another. Additionally, it is believed that money just serves as a means of exchange, despite the fact impacts the manufacturing process. Money, therefore, plays a neutral role.
Criticism of Say's Law
J. M. Keynes challenged Say's law for the following reasons.
Demand does not originate from the supply. Say's law states that supply and demand are mutually exclusive, however, Keynes rejects this idea. Keynes claims that demand does not rise as quickly as production in the modern era. Additionally, buying products made in the home economy is not possible.
It is impossible to self-adjust. Say's law presupposes that full employment will be sustained over the long term through the shelf-adjustment mechanism. But in contrast to the shelf-an adjustment mechanism over the long term, Keynes claimed that employment might be boosted by raising the rate of investment. He didn't believe that we will all be alive in the long term, nor was he in favor of it.
Money isn't impartial. According to Say's law, money plays an unimportant and unaffected role in all aspects of economic activity. Keynes accords money its proper importance. He claims that people hold money for financial and commercial purposes. People save money for unanticipated expenses. Businesspeople save money for upcoming needs. Money, then, is not neutral; it has an impact on economic activity.
It's possible to produce too much. Although Say's law rules out the possibility of overproduction, Keynes is opposed to it. He thinks that not all of the factor income is spent. Although a percentage of income is saved, investing is not done automatically. Saving and investing are therefore never unequal. As a result, the economy continues to have overproduction and unemployment issues.
Need for state intervention Say's law is founded on free market principles, but Keynes has focused on the necessity of state intervention through fiscal and monetary policies during periods of overproduction and mass unemployment.
Pigou supported a wage-cut approach to address the unemployment issue despite the law's disapproval. But Keynes opposes the program of wage reductions. According to him, wage reductions cause a deficit in aggregate demand, which causes unemployment to rise rather than decrease. So a pay cut is not a good idea.
Say contends that the rate of interest restores saving and investment equality, but Keynes disagrees, arguing that saving and investment equality is restored through income.
He argues that achieving equality between them will depend more on a change in income than on the rate of interest.
Keynes claimed that full employment is a peculiar case because capitalist economies have no unemployment. Supply is consistently greater than demand in capitalist economies, which are not found to operate by the law. As a result, a large number of workers are eager to work for the going salary but are nonetheless unemployed.
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