Full Employment by Classical Economist View: An Overview
John Maynard Keynes referred to economists before him as "classical." The term "classical" typically encompasses the period before 1930, which was dominated by the influential works of Adam Smith (author of "Wealth of Nations" in 1776), David Ricardo (whose book "Principles of Political Economy" was published in 1817), and John Stuart Mill (whose "Principles of Political Economy" came out in 1848). Later economists, known as "neoclassical," including Alfred Marshall and A.C. Pigou, built upon classical ideas.
The term "classical economists" was also coined by Karl Marx to describe the economic thoughts of Ricardo and other economists before him, including Adam Smith. However, according to Keynes (1936), the term was used to refer to the followers of David Ricardo, such as John Stuart Mill, Alfred Marshal, and Pigou.
The classical economic ideas, dominant before 1930, were primarily focused on microeconomic issues. These economists, including Adam Smith, David Ricardo, and John Stuart Mill, believed in the market's ability to optimize outcomes through the actions of firms and households, who sought to maximize profits and utilities, respectively. This viewpoint was informed by the laissez-faire philosophy, which held that the government should have minimal involvement in business affairs. Additionally, classical economists believed in the concept of the "invisible hand," in which individual pursuit of self-interest leads to overall economic welfare. They assumed a continuously clearing market with perfect competition, leading to full employment and smooth functioning, and subscribed to Say's Law, which states that production creates its own demand. Classical economists also believed that growth came from increases in factors of production and technology, and saw money as merely a means of exchange. They emphasized the importance of real factors in determining economic outcomes and advocated for free market systems without government intervention. Classical economists believed that labor and other resources are always fully employed and that general overproduction and general unemployment are impossible. If there is unemployment, it is seen as temporary or abnormal. The reasons for unemployment, according to classical views, are government or private monopolies, incorrect business calculations and decisions, and artificial resistance.
Classical economists also believed that the economy is self-adjusting and perfectly competitive, with the pricing system serving as the planning mechanism. They assumed that prices and wages are flexible and adjust automatically to bring about full employment. If there is overproduction and unemployment, prices will fall, which will increase demand, leading to rising prices and stimulating production, and reducing unemployment. Cutting wages would also reduce unemployment by increasing the demand for labor.
Say's Law is the foundation of classical economics and supports the assumption of full employment as a normal condition in a free-market economy. According to Say, supply creates its own demand and production creates a market for goods, meaning that there can be no overproduction and that aggregate demand will always equal aggregate supply. Classical economists believed that all savings are spent automatically on investment goods and that the interest rate will equalize the gap between saving and investment. The basic assumptions of Say's Law include a perfectly competitive market, free flow of money income, equal savings and investments, no government intervention, limited market size, and a closed economy.
Pigou's theory states that unemployment occurs because demand changes occur continually and frictional resistances prevent the appropriate wage adjustment. Pigou believed that unemployment could be reduced by government intervention, such as government spending and taxation, to increase aggregate demand and stimulate production.
Classical economists believed that the economy has the ability to achieve full employment on its own without government intervention and that full employment is the natural state of the economy, where all resources, including labor, are fully utilized. Unemployment is caused by temporary factors such as wages that are too high or a lack of skills among workers. If wages were allowed to adjust to market levels and workers acquired the necessary skills, the economy would naturally achieve full employment. Market forces of supply and demand would ensure that prices and wages adjust to clear the market and bring about full employment.
In conclusion, classical economists believed that the economy is self-regulating and can reach its natural level of output when all its resources are fully utilized. This belief is based on the principles of Say's Law and the flexibility of prices, wages, and interest rates. If the economy saves some of its income, the interest rate will fall and encourage investment, bringing the economy back to its natural level of output. Unemployment in the labor market is considered voluntary and can be solved if workers accept lower wages. The economy is capable of reaching full employment on its own without government intervention, with full employment being the absence of involuntary unemployment (when people are willing and able to work but do not get any work). The theory also assumes the rationality of individuals, lack of government interference, perfect competition, a closed economy, flexibility in wages, rate of interest and prices, constant technology, and money as a medium of exchange.