John Maynard Keynes And The Classical Theory Of Unemployment

The basic premise of the classical theory of unemployment was that a market economy would ultimately and automatically move towards full employment. This widespread belief prevalent in the classical theory was based on the principle referred to as Say’s Law which basically states that “supply creates its own demand”. This essentially means that as firms generate output, they also generate enough income in order to absorb that output. Therefore, this belief in the economy’s ability to maintain full employment conditions when left to itself lead economists to adopt the principle of laissez-faire, i.e. of non-intervention by the government. This conception of employment gained immense support and was universally accepted until 1929, when the Great Depression caused economists to question the validity of the classical theory of unemployment.

This provides the context under which the Keynesian theory of unemployment was formulated. John Maynard Keynes was one of the most prominent critics of the classical model and expressed his opposing views in his influential work, known as The General Theory of Employment, Interest and Money, published in 1936. The main aspect of his theory was the belief that demand caused supply, rather than the inverse causal relationship which was suggested by the classical theory.

According to Keynes, production decisions are based on considerations of expected demand or total expected spending by consumers. Therefore, the more the level of spending,