Simple Theory of Income Determination

Simple Theory of Income Determination:

Adam Smith (1723-90), Thomas Malthus (1766-1834), Jean-Baptist Say (1767-1832) and David Ricardo (1772-1823), were the most well-known classical economists. Their thinking on the macro economic issues (like income and unemployment) has generally been shaped by their time and conditions of 18th and 19th centuries. However their ideas have too influenced the thinking of succeeding generations.

Their thought of how free market would resolve unemployment was broadly accepted until the Great Depression of 1930s. The huge Depression crippled the free enterprise economies of US and UK with very high level of unemployment and excess in the market. J.M. Keynes (1883-1964), after having inspected the depression, had revolutionized the macroeconomic thinking via his writings. His ideas have made bigger impact on governments and their role in resolving unemployment until recent times. His thoughts underlie all modern macroeconomic theories.

Classical Theory of Full Employment:

The classical economists supposed that the productive capacity of a country chooses how much to be formed. An economy generates as much as it can. It supposes the existence of full employment. It has not thought of unemployment of any factor of production, mainly labor. The confidence that market makes it possible to sell the whole thing that is generated is based upon Say’s law. The Say’s Law of market is a denial of the possibility of common over-production or mass unemployment deficiency of approximate demand in a free economy.


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