A question from Yahoo! Answers:
Why did Classical economists assume full employment situation in the economy?
In classical theory, full employment implies that all persons willing to work at the preaviling wage rate will find employment, and the only possible state of unemployment would be frictional displacement, that happens between two jobs. Basically, they were assuming that in the long-run, there was full employment of resources. I understand that assumptions are important in economics, and this particular statement is the basis for many theories. My question is.. It must have been very obvious to these economists that full employment was NOT preavailing in the economy. YET they chose to disregard the truth, and build their thoeries on unreal assumptions, thus creating models that are useless and irrelevant in the real world. What were the implications of this assumption on classical theory? What justifies, if anything does at all, the attempt to create a body of knowledge that has very limited applacation?
Because that was the reality they saw. In 1700s and 1800s, economies responded to downturns by declining wages, not by increasing unemployment. This began to change, first in England around 1840, then in other countries. Classical economies turned Keynesian one by one…