According to classical economists the method of overcoming the problem of unemployment is cutting down of competitive wage rate as explained in the Marginal Productivity theory. However, such a solution in not applicable in practice particularly in the third world countries where the supply of labour exceeds the demand for it and thereby labourers in these countries are already living at subsistence level. Thus, as a result of cutting down the wage rate they would eventually be led to starvation. This would lead to the creations of a new problem instead of saving the problem of unemployment. Moreover, in this age of democracy labourers cannot really tolerate such a low wage rate and would express grievance through trade, unions, strikes, etc.

This theory represents the working of a laissez-faire economy which fluctuates through changes in the forces of demand and supply. This means that it is rather impossible to achieve a stable equilibrium a full employment level in such an economy. Therefore the problem of unemployment will surely exist to a certain extent in a laissez-faire economy. It appears that this theory is more applicable in a Socialist Economy where the government attains full control of the whole economy system and can, therefore, cut the wage rate so as to maintain full employment.

According to J.M. Keynes, the policy of cutting down wage rate would aggravate the problem of unemployment rather than achieving full employment. Keynes’ reason for this statement is that by cutting down the wage rate aggregate demand for goods and services would fall, production level would also fall and eventually firms would close down as a result of a fall in the level of investment. Thus, according to Keynes’ more unemployment will take place as a result of cutting down the wage rate rather than a tendency towards full employment.

Furthermore, Keynes’ says that unemployment in a laissez-faire economy in not something to be alarmed about, but it is in fact an inevitable phenomenon simply because the level of employment depends upon the effective demand which in turn relies upon the level of investment. Similarly, the level of investment mainly depends upon future business expectations and if at any time these expectations indicate a bleak future, the level of investment would naturally fall and thus unemployment takes place.

Keynes challenged the assumption of interest elasticity of aggregate saving and investment. He says that it is the national income and not the rate of interest which brings equilibrium between saving and investment. According to him, when investment goes up, the level of income goes up and consequently, saving goes up to become equal to higher level of investment.

Classical economists assume that there is perfect competition in the product and factor markets. This is not realistic because in the modern capitalist economies there is a string tendency towards the establishment of monopolies. This hinders the working of free forces of demand and supply in the product and factor markets.

Keynes points out that laissez-faire economy has a natural tendency to fall into a slump and this situation can be remedied only through state intervention in the form of public investment and other fiscal measures. Thus, Keynes justifies state intervention in clear contradiction to the concept of free enterprises economists.

Evidently we gather from the theory that classical economists were against labour laws minimum wage legislation, the concept of collective bargaining, unemployment allowance, etc, for the labourers. However, nowadays the negation of such practices would be considered as unjust and against morality. Moreover, cutting down the wage rate would retard growth rate of the economy because a reasonable wage rate always acts as an incentive to stimulate production.

Last but must be last, practical experience shows that there has been massive unemployment in the past in advanced countries. Following are evidences which establish the existence of unemployment in these countries:

During the two world wars the United Kingdom had suffered greatly from unemployment as the rate of unemployment in the country at that time varied from 10-22%.

During the years 1932-37, the level of unemployment in the United States of America was 15 billion. In spite of the application of economic policies the level of unemployment could not be reduced to less than 7.5 billion in 1937. Thus, this clearly points out that the theory of full employment was just imaginary.

Finally, during the period of the Great Depression in the early 1930s, there was massive unemployment throughout the world and the reality of this phenomenon establishes a nation against the concept of full employment.