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To me, the most extraordinary thing regarded historically, is the complete disappearance of the theory of the demand and supply for output as a whole, i.e. the theory of employment, after it had been for a quarter of a century the most discussed thing in economics.
Thus, full employment of labor corresponds to potential output. Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort. In theory, this keeps the labor market flexible, allowing room for new innovations and investment.
The above does not exhaust the possibilities. John Maynard Keynes thought of classical economics as starting with Ricardo and being ended by the publication of his own General Theory of Employment Interest and Money. The defining criterion of classical economics, on this view, is Say's law which is disputed by Keynesian economics. Keynes was ...
An economic depression for instance, would not necessarily set off a chain of events leading back to full employment and higher wages. Keynes believed that government action was necessary for the economy to recover. In Book V of Keynes's theory, Chapter 19 discusses whether wage rates contribute to unemployment and introduces the Keynes effect.
In the Shapiro-Stiglitz model workers are paid at a level where they do not shirk, preventing wages from dropping to full employment levels. The curve for the no-shirking condition (labeled NSC) goes to infinity at full employment. In efficiency wage models, workers are paid at levels that maximize productivity instead of clearing the market. [165]
The General Theory challenged the earlier neoclassical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshall and Pigou.
post-keynesian economics disagrees with the notion of the long-term neutrality of demand, arguing that there is no natural tendency for a competitive market economy to reach full employment. Other viewpoints on economic issues from outside mainstream economics include dependency theory and world systems theory in the study of international ...
In Keynesian economic theory, equilibrium is typically assumed to occur at less than full employment, an assumption that is justified by appealing to the empirical connection between employment and output known as Okun's law. Aggregate expenditure can be broken down into four component parts.