The classical economists believe that there is always full employment of resources in the economy of a country, and, hence the problem of unemployment does not exist. The classical theory of full employment is based on Say’s Law of Markets.

J.B. Say has given the Law of Markets which is “supply creates its own demand.” According to this law, whatever is produced in a free enterprises economy is automatically demanded and over a long period of time, when the supply of goods and services increases, the demand for it also increases automatically and vice versa. Hence, thee is no question of over production or employment and the economy remains at full employment as a normal course of its operation.

With the assumption of full employment, J.B. Say notes down the market mechanism in the following way. “When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest the value should vanish in his hands. Nor is he less anxious to dispose off the money he may get for it; for the value of money is also perishable. But the only way to getting rid of money is the purchase of some product or other. Thus, the more circumstance of the creation of one immediately opens a vent for other products.” Hence, aggregate demand would be equal to aggregate supply which means that there cannot be general over-production or employment.

Say’s law of markets has been interpreted by the classical economists, Alfred Marshall and J.S. Mill as follows:

According to Alfred Marshall, “A man is devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

Thus, the above quotation simply means that a typical man produces for the sake of future consumption and that everybody consumes commensurate with his own level of production. Hence, this quotation shows that there is not going to be any over production and unemployment.

According to J.S. Mill, “All sellers are inevitably, and by the meanings of the word buyers. Could we suddenly double the production powers of the country, we should double the supply of commodities in every market; but we would by the same stroke, double the purchasing power. Everybody would bring a double demand as well as double supply.”

This question is a crystal clear explanation of “Supply creates its own demand”. According to it, if the production resources of a country i.e. land, labour, capital and organization are doubled, production of goods and services and their supply would be also be doubled. Consequently the aggregate demand of the people would be doubled because in the aggregate sense of the world, the people of a country are themselves the producers as well as consumers.

Thus, from the above explanation, we find that Say’s law of markets can be explained both in a barter economy as well as in a monetary economy.

Every producer produces goods and services more than his own personal requirements with the intention that the excess amount of goods and services would be brought into the market for exchange with the goods and services produced in excess by other producers. This method of production and the system of exchange is carried out in the economy throughout the year and, hence, aggregate supply becomes equal to the aggregate demand. Therefore, there exists no question of over production or even unemployment.

Keeping in view the barter economy, Ricardo expresses Say’s law of markets in the following words: “No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity which may be useful to him, or which contributes to further production. By producing, then, he necessarily becomes either the consumer of his own goods or the purchaser and consumer of the goods of some other persons. Productions are always bought by productions; money in only the medium by which the exchange is affected.”

In a monetary economy, goods and services are produced throughout the year by the combination of four factors of production. They are given rewards in the form of rent, interest, wages and profits respectively for the services rendered. These rewards are simply used for purchasing the goods and services. So the consumers pay back these rewards are simply used of purchasing the goods and services purchases. Hence, aggregate supply = aggregate demand. Therefore there is no over production, as in the aggregate sense, people living in a country are by themselves the producers as well as the consumers. With the same token no question of unemployment arises according to Say’s law of markets.