The concept of a “classical theory” of unemployment is ambiguous. “Classical” in the economic sense refers to the ideas of Adam Smith and those who followed him. “Classical” can also mean the merely old, or more commonly, the era of Greek and Roman dominance of the Mediterranean. “Classical economics” refers to the central enlightenment ideas of individualism, property and increasing production.
The Capitalist Theory
“Classical economics” can generally mean “capitalist,” or market-driven, economics. In this general approach, markets, so long as they can function without hindrance, are the best means of allocating resources. Unemployment exists according to this theory only when the state, society or other force impinges on the working of the market. If the government were to cut taxes, for example, firms would make more profit, produce more, and thus, hire more workers.
Radical theories of economics and unemployment proliferated in the 19th century. For them, the market was a smoke screen to justify the constant profiteering of capitalist enterprise. P. J. Proudhon was a 19th century anarchist who saw both the state and the firm as two sides of the identical coin: they worked together and shared profits among themselves. Workers were merely chattel to be hired and fired at will by this huge state-capital nexus. Profit is the real cause of unemployment. Since so much money is unjustly accrued to the owning classes and the state, there is little money left for labor. The more power the owners of capital receive, the more money they reward themselves, completely out of proportion to their actual usefulness. Unemployment exists, therefore, because of the political power the bosses have over the allocation of resources.
J.M. Keynes struggled with Smith's basic approach. For Keynes, the market is imperfect, slow moving and easy to manipulate. Firms are just as powerful as governments and do manipulate markets for their own purposes. Wages, for example, can remain high for a long period of time even after the market changes. If there is an increase in the demand for labor, companies may just decide to squeeze more out of their existing workers -- or automate production -- rather than hiring. Unemployment in this approach is as much the result of firm decisions outside as within the market structure.
The Classical Approach
In general, the older, classical approach stresses economics as a separate science, acting according to its own laws. For most radical theories, economics is the only science, since all social life and divisions of power come from the access to capital. Regardless of the basic ideological bias, the basic classical idea is that unemployment comes from a distortion in a “market” that harms labor. The radical and Keynesian approach stresses that the market is itself the problem and is highly imperfect, while the capitalist approach holds that markets work, so long as states mind their own business and stop trying to “improve” society.