criticism of classical theory of employment

6. When a producer produces goods and pays wages to workers, the workers, in turn, buy those goods in the market. The Classical Vs.Keynesian Models of Income and Employment! For instance, when the quantity of money increases, the rate of interest falls, investment increases, income and output increase, demand increases, factor costs and wages increase, relative prices increase, and ultimately the general price level rises. This, in fact, led to the Great Depression. Classical economists such as, J.S. Keynes raises a severe attack on Say’s law of markets. Keynes had no patience to wait for the long period for he believed that “In the long-run we are all dead”. There is overproduction and fall in investment, income, employment and output. (vi) Techniques of production and business organisation do not change. Thus, saving-investment equality (S = I) gives the market clearing condition in the product market at full employment level. The logic of this argument can be easily grasped with the help of the following algebric expression. The determination of output and employment in the classical theory occurs in labour, goods and money markets in the economy. 4. Thus, Y and V being constant, the price level (P) is determined by the supply of money (M) and there is a direct relationship between M and P; changes in the money supply lead to proportional changes in the price level. This implies that supply docs not create its own demand. Remove these obstructions, allow the natural working of the economic system, and the unemployment will automatically end. Criticism # 2. They are not only costs of production, but also form the incomes of labourers. Similarly, the classical economists also considered frictional unemployment as consistent with their assumption of full employment. In the long run, the economy will automatically tend toward full employment when the demand and supply of goods become equal. Each market involves a built-in equilibrium mechanism to ensure full employment in the economy. Since S > I, the investment demand for capital being less than its supply, the interest rate will fall to Or, investment will increase and saving will decline. But beyond point E, as more workers are employed, diminishing marginal returns start. So the velocity of circulation of money (V) may slow down and not remain constant. The two curves intersect at point E. The equilibrium rate of interest is Oi, where saving and investment are equal (i.e., iE). His theory of employment is widely accepted by modern economists. //

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