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Unit-5: Classical Theory of Employment

Self Assessment Notes

Multiple Choice Questions:
4. Classical economist consider the savings of interest-
(a) Reward (b) Measurement
(c) Part (d) None of these.
5. This basic………………………..is not change on get the currency.
(a) principle (b) rule
(c) exchange (d) non of these
6. Saving consider the increasing function and investment consider the —
(a) Diminishing function (b) Increasing function
(c) Cost (d) None of these.

5.3 Keynes’ Criticism of Classical Theory

Keynes’ criticize this principle because of the unreal perception of Classical principle of employment.
He writes in his book General Theory that “Classical principle is continuing to assuming those specific,
they did not keep relation with that economic society in which we lives, which magnitude is that
when we are apply it on reality experience, then its training is prove doubtful and destructive. We
have as hope of behaviour by his economies, it expressed that style. But it consider that it happen,
close the eyes by difficulties.”
Keynes’ attacked on classical principle because of following reason-
1. Under-employment Equilibrium: Keynes rejected the basic classical perception of balanced
full employment in economics. He told unreal to this perception. He consider a specific
condition to full employment. Under-employment is the normal situation in socialist
economy. Its reason is that capitalism is not work according to the rule of Say and supply is
always increased by demand. We see that lacs of labour are ready to work on present wages
and less than that, but they did not get work. So the existence of involuntary unemployment
in capitalism economy proved that under-employment is the normal situation and full
employment balanced situation is abnormal an d immediate.
2. Over-production Possible: Keynes’ is disclaimer the market rule of Say that supply creates
its own demand. His perception is that all income earned by sources-owner is not spent to
purchase that things on which they helpful for production. Some part is saving from the
earned income, which are not automatically invested because saving and investment are
two separate works. So when all earned income is not spent on customer things and some
part remains, then total demand reduces. Resultantly it is normal hyper production, because
all could not sold which has been produced, further, it lead to common unemployment. so
by this to take the support of this rule Keynes settle the fruitless the Keynes’ rule that the
nature of frontier is less than one.
3. Self:adjustment Impossible in the Economy- Keynes’ was not satisfied by this idea of classical
economist that for the self process of full employment balance, laissez faire is necessary. He
decides that capitalism system is not self adjust because of unequal structure of their society.
There are two major class- rich and poor. Rich have more money but they did not spend all
money on consumption. Poor have no money for purchase the consumption things. So in
the comparison of total supply there are normal low levels of total demand by this there are
over-production and unemployment in economy, then it is never happen. So ‘big depression’
was the result of it. If capitalism arrangement is self adjusted, then never happen that. So

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