Keynes Theory of Income and Employment

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KEYNES THEORY OF INCOME AND EMPLOYMENT

CONTENT OF REPORT

• CLASSICAL THEORY OF EMPLOYMENT

• KEYNES CRITICISM OF CLASSICAL THEORY OF EMPLOYMENT

• KEYNES THEORY OF INCOME AND EMPLOYMENT

• SIGNIFICANCE OF KEYNES THEORY

• Criticism on Keynes’ Theory

KEYNES THEORY OF INCOME AND EMPLOYMENT

The theories of employment are broadly classified into two:
(a)    Classical theory of employment
(b)   Keynesian theory of employment.
The classical theory assumed the prevalence of full employment. The ‘Great Depression’ of 1929 to 1934, engulfing the entire world in widespread unemployment, low output and low national income, for about five years, upset the classical theorists. This gives rise to Keynesian theory of employment.

Classical Theory of Employment:-
The term ‘classical economists’ was firstly used by Karl Marx to describe economic thought of Ricardo and his predecessors including Adam Smith. However, by ‘classical economists’, Keynes meant the followers of David Ricardo including John Stuart Mill, Alfred Marshal and Pigou. According to Keynes, the term ‘classical economics’ refers to the traditional or orthodox principles of economics, which had come to be accepted, by and large, by the well known economists by then. Being the follower of Marshal, Keynes had himself accepted and taught these classical principles. But he repudiated the doctrine of laissez-faire. The two broad features of classical theory of employment were: (a)    The assumption of full employment of labour and other productive resources, and (b)   The flexibility of prices and wages to bring about the full employment (a) Full employment:-

According to classical economists, the labour and the other resources are always fully employed. Moreover, the general over-production and general unemployment are assumed to be impossible. If there is any unemployment in the country, it is assumed to be temporary or abnormal. According to classical views of employment, the unemployment cannot be persisted for a long time, and there is always a tendency of full employment in the country.

(b) Flexibility of prices and wages:-
The second assumption of full employment theory is the flexibility of prices and wages. It is the flexibility of prices and wages which automatically brings about full employment. If there is general over-production resulting in depression and unemployment, prices would fall as a result of which demand would increase, prices would rise and productive activity will be stimulated and unemployment would tend to disappear. Similarly, the unemployment could be cured by cutting down wages which would increase the demand for labour and would stimulate activity. Thus, if the prices and wages are allowed to move freely, unemployment would disappear and full employment level would be restored.

Say’s Law:-
1. Say’s Law is the foundation of classical economics. Assumption of full employment as a normal condition of a free market economy is justified by classical economists by a law known as ‘Say’s Law of Markets’. 2. It was the theory on the basis of which classical economists thought that general over-production and general unemployment are not possible. 3. According to the French economist J. B. Say, supply creates its own demand. According to him, it is production which creates market for goods. More of production, more of creating demand for other goods. There can be no problem of over-production. 4. Say denies the possibility of the deficiency of aggregate demand. 5. The conceived Say’s Law describes an important fact about the working of free-exchange of economy that the main source of demand is the sum of incomes earned by the various productive factors from the process of production itself. A new productive process, by paying out income to its employed factors, generates demand at the same time that it adds...
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