Theory of Employment
A central aspect of the Keynesian revolution was a change in theory concerning the factors determining employment levels in the overall economy. The revolution was set against the orthodox classical economic framework, and its successor, neoclassical economics, which based on Say's Law argued that unless special conditions prevailed the free market would naturally establish full employment equilibrium with no need for government intervention. This view held that employers will be able to make a profit by employing all available workers as long as workers drop their wages below the value of the total output they are able to produce – and classical economics assumed that in a free market workers would be willing to lower their wage demands accordingly, because they are rational agents who would rather work for less than face unemployment.
Keynes argued that both Say's Law and the assumption that economic actors always behave rationally are misleading simplifications, and that the classical economics was only reliable at describing a special case. The Keynesian Revolution replaced the classical understanding of employment with Keynes's view that employment is a function of demand, not supply.
Read more about this topic: Keynesian Revolution
Famous quotes containing the words theory of, theory and/or employment:
“We commonly say that the rich man can speak the truth, can afford honesty, can afford independence of opinion and action;—and that is the theory of nobility. But it is the rich man in a true sense, that is to say, not the man of large income and large expenditure, but solely the man whose outlay is less than his income and is steadily kept so.”
—Ralph Waldo Emerson (1803–1882)
“Won’t this whole instinct matter bear revision?
Won’t almost any theory bear revision?
To err is human, not to, animal.”
—Robert Frost (1874–1963)
“Not only our future economic soundness but the very soundness of our democratic institutions depends on the determination of our government to give employment to idle men.”
—Franklin D. Roosevelt (1882–1945)