Simple Theory of Income Determination

Simple Theory of Income Determination

Adam Smith (1723-90), Thomas Malthus (1766-1834), David Ricardo (1772-1823), and Jean-Baptist Say (1767-1832) were the most prominent classical economists. Their thinking on the macro economic issues (such as income and unemployment) has mostly been shaped by their time and circumstances of 18^th and 19^th centuries. But their ideas have also influenced the thinking of subsequent generations.

Their idea of how free market would solve unemployment was widely accepted until the Great Depression of 1930s. The Great Depression crippled the free enterprise economies of US and UK with high level of unemployment and glut in the market. J.M. Keynes (1883-1964), after having examined the depression, had revolutionized the macro economic thinking through his writings. His ideas have made greater impact on governments and their role in solving unemployment until recent times. His ideas underlie all modern macro economic theories.

Classical Theory of Full Employment

The classical economists believed that the productive capacity of a country decides how much to be produced. An economy produces as much as it can. It assumes the existence of full employment. It has not thought of unemployment of any factor of production, particularly labour. The confidence that market makes it possible to sell everything that is produced is based upon Say's law. Say's Law of market is a denial of the possibility of general over-production or mass unemployment deficiency of aggregate demand in a free economy.