Question

J.B. Say and the Classical economists, followers of Say’s Law, offered two explanations of why a recession or economic depression (like the Great Depression) would be short-lived. Unemployment would disappear and leakages of savings would not be a problem for the economy. What are those explanations?

Answer 1

The Classical school of thought is based on the following two assumptions which explains that recession or economic depression in the economy would be short lived;

1. Economy is at full employment level: Classical believed that economy will always remain full employment level. They considered that there is absence of involuntary unemployment in the economy because demand creates its own supply which will create demand for labor and thus full employment equilibrium occurs in the economy.

2. Wage - Price Flexibility: The wages and prices in the economy are flexible. This means that rates are capable of moving upwards or downwards under the pressure of demand and supply in thee respective markets. Thus, wages adjust which equates labor demanded with labor supplied in the economy.

The above two assumptions state that the unemployment would disappear and leakages would not be a problem for the economy.