Says Law of Market
The classical theory of employment is based on Say’s Law of market. According to this law, “ Supply creates it own demand”.
J.B.Say a French Economist propounded this law and according to this law there can never be general over production and general unemployment. According to him, “ it is production which creates markets for goods”. Indeed main source of demand is the factor incomes. It means that along with the beginning of the task of production there is possibility of certain outputs and demand for that outputs and demand for that output is simultaneously generated due to payment of remuneration to the factors of production. Thus, every output brought into existence, creates or generates an equivalent amount of purchasing power in circulation resulting in its sale. And in this theory there is no question of over production. Consequently there is no possibility of general unemployment.
The classical theory of employment assumes the following facts :
- There is presence of perfect competition in the goods market and factor markets specially in labour market.
- There is presence of completely free capitalist economy.
- There is presence of free market price system or price mechanism.
- The economy is completely closed one having no relation with foreign countries.
- Total output in economy is divided between consumption and investment goods.
- There is presence of full employment in the economy.
- Wages and prices are flexible or changeable.
But it may be pointed out that there may be presence of voluntary unemployment and frictional unemployment. But all these conditions may prove true only when there is absence of any external intervention in the working of economy. In other words either the government or the trade unions are not supposed to make any interventions in the working of the economy.
According to A.C.Pigou there may be possibility of involuntary unemployment due to rigidity or inflexibility of the wage structure. This is why he suggested the policy of wage flexibility to cure the crisis of involuntary unemployment.
Prof.J.S.Mill also admitted the truth , “ whatever the amount of the annual produce, it can never exceed the amount of the annual demand.”
The Say’s law of market has important policy implications.
The law is criticised on the following grounds : –
- From the point of view production supply of goods doesn’t creates its own demand.
- From the point of view of employment the supply of labour doesn’t automatically adjust itself to its demand.
Ofcourse this law is based on assumptions that people spend their entire income on the purchase of goods and they don’t have any saving. As a result of which whatever is produced is ultimately sold off in the market.
But according to critics the truth is that people don’t spend their entire income and that they also save apart of their income for future use.
Consequently the demand for goods at present gets reduced or becomes less by the amount of saving. It means that the saving proofs a type of leakage in this process and it retards or obstructs the process of income expenditure flow of economy.
Consequently due to act of saving there is emergence of situation of or problem of deficiency of aggregate demand resulting in over production in the economy.
But in reply to this criticism classical economists pointed out that whatever income is saved is ultimately converted into investment or investment expenditure.
With respect to first criticism Say’s Law of market proved baseless and wrong during the Great Depression of 1929 -1930.
With respect to second criticism it was made clear that unemployment is found in almost all the capitalist countries.
Even the policy of wage flexibility or wage reduction doesn’t solve the problem of unemployment. On the contrary the situation may become even worse. Because due to the wages purchasing power of labours decreases and thus there is still more deficiency of aggregate demand in the economy.