Question

Discuss in brief classical views on full employment.

Answer 1

As per Lerner, full employment is a condition where everyone who is willing to work at the current wage rate can find a job without facing significant obstacles. In this scenario, there is no involuntary unemployment. Therefore, full employment refers to a situation where, under normal circumstances, all individuals ready to work at the prevailing wage level are employed.

1. Say’s law of markets: One of the cornerstones of classical economics is say’s law, which states that “Supply creates its own demand”. According to this principle, whatever is produced in the economy will eventually be sold, and all income earned from production will be used either for consumption or investment. Hence, there is no possibility of general overproduction or unemployment.
2. Wage-price flexibility: Classical economists believed in the flexibility of wages and prices. They argued that any unemployment in the economy would be temporary. If unemployment occurred, wages would fall, making it cheaper for firms to hire workers, thereby restoring full employment automatically.
3. No government intervention: Classical theory discouraged government intervention in the economy. They believed that the free market mechanism is capable of adjusting itself without external interference. The forces of supply and demand would bring the economy back to equilibrium.
4. Voluntary vs involuntary unemployment: In the classical view, only voluntary unemployment could exist. In other words, if someone is unemployed, it’s because they are not willing to work at the prevailing wage rate, not because there are no jobs. Involuntary unemployment was considered impossible in a properly functioning market.
5. Long-run perspective: Classical economists focused on the long-term equilibrium of the economy. They acknowledged that short-term fluctuations might occur but believed that the economy naturally gravitates towards full employment over time.