The Classical Theory of Employment and Full Employment

The Classical Theory of Employment, also known as the Say's Law, is an economic theory that explains how the economy functions in a state of full employment. According to this theory, the economy has a natural tendency to move towards full employment, where all available resources are fully utilized, and there is no involuntary unemployment.

Deviations from Full Employment

While the Classical Theory of Employment assumes that the economy tends to operate at full employment, it acknowledges that there can be temporary deviations from this state. These deviations are considered to be purely temporary in nature and are expected to be self-correcting over time. The theory suggests that market forces will eventually restore the economy to full employment.

Explanation of the Answer (Option A)

Option A states that deviations from full employment are purely temporary in nature, which is the correct answer according to the Classical Theory of Employment. Let's delve deeper into why this is the case:

1. Market Mechanism: The Classical Theory of Employment argues that the market mechanism, driven by supply and demand, ensures that resources are allocated efficiently and effectively. When there is a temporary deviation from full employment, market forces come into play to correct the situation.

2. Flexible Wages and Prices: According to the classical economists, wages and prices are flexible and adjust quickly to changes in demand and supply. In the case of temporary unemployment, wages are expected to decrease, which would lower production costs and incentivize employers to hire more workers. Similarly, lower prices would stimulate demand, leading to increased production and employment.

3. Capital Accumulation: The Classical Theory of Employment emphasizes the role of capital accumulation in promoting economic growth and full employment. During periods of temporary unemployment, savings and investment are expected to increase, leading to the accumulation of capital. This, in turn, drives economic growth and eventually restores the economy to full employment.

4. Elimination of Involuntary Unemployment: In a state of full employment, there is no involuntary unemployment, meaning that all individuals who are willing and able to work can find employment. The classical economists believed that any unemployment experienced in the economy is voluntary or temporary in nature, as individuals adjust their expectations and preferences in response to changing market conditions.

In summary, according to the Classical Theory of Employment, deviations from full employment are considered purely temporary in nature. The theory argues that market mechanisms, flexible wages and prices, capital accumulation, and the elimination of involuntary unemployment will eventually restore the economy to a state of full employment.