Question

Classical always believes in the full-employment in economy while Keynes in underemployment. Comment and justify the version.

Answer 1

Classical View: Full employment as a natural condition.

• Full employment is the normal state of a capitalist economy.
• The economy is self-adjusting through the free interaction of supply and demand.
• Say’s law (supply creates its own demand) ensures that all resources, including labor, are fully employed.
• Any unemployment that exists is considered voluntary, as it consists of people who are not willing to work at the existing wage rate.
• Wage-price flexibility ensures that labor markets always clear. If unemployment arises, wages will fall, prompting firms to hire more workers.

Keynesian View: Underemployment is a real possibility.

• Economies can reach an equilibrium with significant unemployment, called underemployment equilibrium.
• Effective demand (aggregate demand for goods and services) determines output and employment levels.
• Say’s law does not always hold true, as not all income earned is spent, which can lead to a shortfall in demand.
• Wages are not perfectly flexible, and lowering wages can reduce consumer spending, worsening unemployment.
• Unemployment can be involuntary, where people are willing to work at prevailing wages but cannot locate jobs.
• He advocated for government intervention, particularly through fiscal policy, to boost demand and achieve full employment.