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 18th and 19th 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.
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