Question

Which economist was first to go against the view "free markets would automatically provide full employment"

• A. J S Mill
• B. Adam Smith
• C. John Maynard Keynes
• D. Milton Friedman

Hint:

Keynes introduced demand-side economics, which explains why government fiscal intervention (spending) is sometimes necessary to correct market failures during recessions.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Classical economic theory, established by Adam Smith and expanded by classical theorists, suggested that free-market forces would naturally steer the economy toward a full-employment equilibrium.
This assumption was based on Say's Law, which stated that "supply creates its own demand," and that flexible wages and prices would correct any temporary unemployment.

Step 2: Detailed Explanation:
The Great Depression of the 1930s, which caused prolonged global unemployment, challenged the validity of classical economic assumptions.
British economist John Maynard Keynes became the first to systematically dispute the classical view in his 1936 book, The General Theory of Employment, Interest, and Money.
Keynes argued that:
1. Wages and prices are "sticky" and do not adjust downward easily during a recession.
2. The level of employment is determined by aggregate demand, not by supply.
3. In a recession, private demand can fall too low, and the market can remain in an under-employment equilibrium indefinitely unless the government intervenes through fiscal and monetary stimulus.
Let us review the options:
- Option (A) J S Mill: A classical economist who supported classical market theories.
- Option (B) Adam Smith: Championed the "invisible hand" and self-correcting markets.
- Option (C) John Maynard Keynes: First to systematically reject automatic full employment in a free market.
- Option (D) Milton Friedman: A monetarist who supported free markets and generally opposed Keynesian government interventions.

Step 3: Final Answer:
The correct option is (C).