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TheoryofEmployment
TYPESOFUNEMPLOYMENT:
(a)StructuralUnemployment:ItisalsoknownasMarxianunemploymentorlongterm
unemployment.Itisduetoslowergrowthofcapitalstockinthecountry.Theentire
labourforcecannotbeabsorbedinproductiveemployment,becausetherearenot
enoughinstrumentsofproductiontoemploythem.
(b)SeasonalUnemployment:Seasonalunemploymentarisesbecauseoftheseasonal
characterofaparticularproductiveactivitysothatpeoplebecomeunemployedduring
theslackseason.Occupationsrelatingtoagriculture,sugarmills,ricemills,ice
factoriesandtourismareseasonal.
(c)FrictionalUnemployment:Itariseswhenthelabourforceistemporarilyoutofwork
becauseofperfectmobilityonthepartofthelabour.Inagrowinganddynamic
economy,inwhichsomeindustriesaredecliningandothersarerisingandinwhich
peoplearefreetoworkwherevertheywish,somevolumeoffrictionalunemployment
isboundtoexist.Thisissobecauseittakessometimefortheunemployedlabourto
learnnewtradesortoshifttonewplaces,wherethereisademandforlabour.Thus,
frictionalunemploymentexistswhenthereisunsatisfieddemandforlabour,butthe
unemployedworkersareeithernotfitforthejobsinquestionornotintherightplace
tomeetthisdemand.
(d)CyclicalUnemployment:ItisalsoknownasKeynesianunemployment.Itisdueto
deficiencyofaggregateeffectivedemand.Itoccurswhenbusinessdepression
occurs.Duringthetimesofdepression,businessactivityisatlowebband
unemploymentincreases.Somepeoplearethrownoutofemploymentaltogetherand
othersareonlypartiallyemployed.Thistypeofunemploymentisduetothefactthat
thetotaleffectivedemandofthecommunityisnotsufficienttoabsorbtheentire
productiveofgoodsthatcanbeproducedwiththeavailablestockofcapital.When
thebusinessmencannotselltheirgoodsandservices,theirprofitexpectationsarenot
fulfilled.Sotheentrepreneursreducetheiroutputandsomefactorsofproduction
becomeunemployed.
(e)DisguisedUnemployment:Disguisedunemploymentisthemostwidespreadtype
ofunemploymentinunderdevelopedcountries.Inunderdevelopedcountries,the
stockofcapitaldoesnotgrowfast.Thecapitalstockhasnotbeengrowingatarate
fastenoughtokeeppacewiththegrowthofpopulation,thecountryscapacitytooffer
productiveemploymenttothenewentrantstothelabourmarkethasbeenseverely
limited.Thismanifestsitselfgenerallyintwoways:

(i)theprevalenceoflargescaleunemploymentintheurbanareasand
(ii)intheformofgrowingnumbersengagedinagriculture,resultingin
disguisedunemployment.

Indisguisedunemployment,thereisanexistenceofaverybackwardagricultural
economy.Peopleareengagedinproductionwithanextremelyloworzeromarginal
productivity.Sincetheemploymentopportunitiesinnonagriculturalsectorarenot
sufficient,therefore,mostoftheworkersareboundtoworkinagriculturalsector.This
givesrisetotheconceptofdisguisedunemployment,inwhichpeopleareunwillingly
engagedinoccupations,wheretheirmarginalproductivityisverylow.
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THEORIESOFEMPLOYMENT:
Thetheoriesofemploymentarebroadlyclassifiedintotwo:
(a)Classicaltheoryofemployment
(b)Keynesiantheoryofemployment.
Theclassicaltheoryassumedtheprevalenceoffullemployment.TheGreatDepressionof
1929to1934,engulfingtheentireworldinwidespreadunemployment,lowoutputandlow
nationalincome,foraboutfiveyears,upsettheclassicaltheorists.Thisgivesriseto
Keynesiantheoryofemployment.
ClassicalTheoryofEmployment:
ThetermclassicaleconomistswasfirstlyusedbyKarlMarxtodescribeeconomicthought
ofRicardoandhispredecessorsincludingAdamSmith.However,byclassicaleconomists,
KeynesmeantthefollowersofDavidRicardoincludingJohnStuartMill,AlfredMarshaland
Pigou.AccordingtoKeynes,thetermclassicaleconomicsreferstothetraditionalor
orthodoxprinciplesofeconomics,whichhadcometobeaccepted,byandlarge,bythewell
knowneconomistsbythen.BeingthefollowerofMarshal,Keyneshadhimselfaccepted
andtaughttheseclassicalprinciples.Butherepudiatedthedoctrineoflaissezfaire.The
twobroadfeaturesofclassicaltheoryofemploymentwere:
(a)Theassumptionoffullemploymentoflabourandotherproductiveresources,and
(b)Theflexibilityofpricesandwagestobringaboutthefullemployment
(a)Fullemployment:
Accordingtoclassicaleconomists,thelabourandtheotherresourcesarealwaysfully
employed.Moreover,thegeneraloverproductionandgeneralunemploymentareassumed
tobeimpossible.Ifthereisanyunemploymentinthecountry,itisassumedtobetemporary
orabnormal.Accordingtoclassicalviewsofemployment,theunemploymentcannotbe
persistedforalongtime,andthereisalwaysatendencyoffullemploymentinthecountry.
Accordingtoclassicaleconomists,thereasonsforunemploymentare:

(i)Interventionbythegovernmentorprivatemonopoly,

(ii)Wrongcalculationbyentrepreneursandinaccuratedecisions,and

(iii)Artificialresistance.

Theeconomyisassumedtobeselfadjustingandperfectlycompetitiveeconomy.Itisthe
economyinwhichtherelativevaluesofgoodsandservicesaredeterminedbythegeneral
relationsofdemandandsupply.Thepricingsystemservesastheplanningmechanism.
(b)Flexibilityofpricesandwages:
Thesecondassumptionoffullemploymenttheoryistheflexibilityofpricesandwages.Itis
theflexibilityofpricesandwageswhichautomaticallybringsaboutfullemployment.Ifthere
isgeneraloverproductionresultingindepressionandunemployment,priceswouldfallasa
resultofwhichdemandwouldincrease,priceswouldriseandproductiveactivitywillbe
stimulatedandunemploymentwouldtendtodisappear.Similarly,theunemploymentcould
becuredbycuttingdownwageswhichwouldincreasethedemandforlabourandwould
stimulateactivity.Thus,ifthepricesandwagesareallowedtomovefreely,unemployment
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woulddisappearandfullemploymentlevelwouldberestored.Further,theclassical
economiststreatedmoneyasmereexchangemedium.Theyignoreditsroleinaffecting
income,outputandemployment.
SaysLaw:
1. SaysLawisthefoundationofclassicaleconomics.Assumptionoffullemploymentas
anormalconditionofafreemarketeconomyisjustifiedbyclassicaleconomistsbya
lawknownasSaysLawofMarkets.
2. Itwasthetheoryonthebasisofwhichclassicaleconomiststhoughtthatgeneralover
productionandgeneralunemploymentarenotpossible.
3. AccordingtotheFrencheconomistJ.B.Say,supplycreatesitsowndemand.
Accordingtohim,itisproductionwhichcreatesmarketforgoods.Moreofproduction,
moreofcreatingdemandforothergoods.Therecanbenoproblemofover
production.
4. Saydeniesthepossibilityofthedeficiencyofaggregatedemand.
5. TheconceivedSaysLawdescribesanimportantfactabouttheworkingoffree
exchangeofeconomythatthemainsourceofdemandisthesumofincomesearned
bythevariousproductivefactorsfromtheprocessofproductionitself.Anew
productiveprocess,bypayingoutincometoitsemployedfactors,generatesdemand
atthesametimethatitaddstosupply.Itisthusproductionwhichcreatesmarketfor
goods,orsupplycreatesitsowndemandnotonlyatthesametimebutalsotoan
equalextent.
6. AccordingtoSay,theaggregatesupplyofcommoditiesintheeconomywouldbe
exactlyequaltoaggregatedemand.Ifthereisanydeficiencyinthedemand,itwould
betemporaryanditwouldbeultimatelyequaltoaggregatesupply.Therefore,the
employmentofmoreresourceswillalwaysbeprofitableandwilltaketothepointoffull
employment.
7. AccordingtoSaysLaw,therewillalwaysbeasufficientrateoftotalspendingsoasto
keepallresourcesfullyemployed.Mostoftheincomeisspentonconsumergoods
andaparofitissaved.
8. Theclassicaleconomistsareoftheviewthatallthesavingsarespentautomaticallyon
investmentgoods.Savingsandinvestmentsareinterchangeablewordsandareequal
toeachother.
9. Sincesavingisanotherformofspending,accordingtoclassicaltheory,allincomeis
spentpartlyforconsumptionandpartlyforinvestment.
10. Ifthereisanygapbetweensavingandinvestment,therateofinterestbringsabout
equalitybetweenthetwo.
BasicAssumptionsofSaysLaw:
(a)Perfectlycompetitivemarketandfreeexchangeeconomy.
(b)Freeflowofmoneyincomes.Allthesavingsmustbeimmediatelyinvestedandall
theincomemustbeimmediatelyspent.
(c)Savingsareequaltoinvestmentandequalitymustbringaboutbyflexibleinterest
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rate.
(d)Nointerventionofgovernmentinmarketoperations,i.e.,alaissezfaireeconomy,
andthereisnogovernmentexpenditure,taxationandsubsidies.
(e)Marketsizeislimitedbythevolumeofproductionandaggregatedemandisequal
toaggregatesupply.
(f)Itisaclosedeconomy.
PigousTheory:
1.AccordingtoProfessorPigou,theunemploymentwhichexistsatanytimeisbecause
ofthefactthatchangesindemandconditionsarecontinuallytakingplaceandthat
frictionalresistancespreventtheappropriatewageadjustmentfrombeingmade
instantaneously.
2. Thus,accordingtoclassicaltheory,therecouldbesmallamountsoffrictional
unemploymentattendantonchangingfromonejobtoanotherbuttherecouldnotbe
involuntaryunemploymentforalongperiod.
3. AccordingtoProfessorPigou,ifpeoplewereunemployed,wageswouldfalluntilall
seekingemploymentwereinfactemployed.
4. Involuntaryunemploymentwhichwasfoundattimesofdepressionwasbecauseofthe
factthatwageswerekepttoohighbytheactionsoflabourunionsandgovernments.
Therefore,ProfessorPigouadvocatedthatageneralcutinmoneywagesatatimeof
depressionwouldincreaseemployment.
5. AccordingtoPigou,perfectlyelasticwagepolicywouldabolishfluctuationsof
employmentandwouldensurefullemployment.
6. Theoftheeconomyasdescribedbytheclassicaltheoryisdepictedasfollows:

Supposetheconsumersaves10%ofhisincome.Theresultwillbefirmsreceiptsfallbythe
sameproportion.Profitwillfallandthefirmwilltendtoreactbyreducingtheoutputand
hencereducingtheemploymentandincome.Therefore,toavoidthisproblemthesavings
arechannelledtofirmsthroughbanking.

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CriticismofClassicalTheory:
1. Supplymaynotcreateitsowndemandwhenapartoftheincomeissaved.
Aggregatedemandisnotalwaysequaltoaggregatesupply.
2. Employmentinacountrycannotbeincreasedbycuttinggeneralwages.
3. Thereisnodirectrelationshipbetweenwagesandemployment.
4. Interestrateadjustmentscannotsolvesavingsinvestmentproblem.
5. Classicaleconomistshavemadetheeconomycompletelyselfadjustingandself
reliant.Aneconomyisnotsoselfadjustingandgovernmentinterventionis
unobvious.
6. Classicaleconomistshavemadethewagesandpricessomuchflexible.Inpractical,
wagesandpricesarenotsoflexible.Itwillcreatechaosintheeconomy.
7. Moneyisnotameremediumofexchange.Ithasanessentialroleintheeconomy.
8. Theclassicaltheoryhasfailedtoexplaintheoccurrenceoftradecycles.
KeynesianTheoryofEmployment:
KeyneshasstronglycriticisedtheclassicaltheoryinhisbookGeneralTheoryof
Employment,InterestandMoney.Histheoryofemploymentiswidelyacceptedbymodern
economists.Keynesianeconomicsisalsoknownasneweconomicsandeconomic
revolution.Keyneshasinventednewtoolsandtechniquesofeconomicanalysissuchas
consumptionfunction,multiplier,marginalefficiencyofcapital,liquiditypreference,effective
demand,etc.Intheshortrun,itisassumedbyKeynesthatcapitalequipment,population,
technicalknowledge,andlabourefficiencyremainconstant.Thatiswhy,accordingto
Keynesiantheory,volumeofemploymentdependsonthelevelofnationalincomeand
output.Increaseinnationalincomewouldmeanincreaseinemployment.Thelargerthe
nationalincomethelargertheemploymentlevelandviceversa.Thatiswhy,thetheoryof
Keynesisknownastheoryofemploymentandtheoryofincome.
TheoryofEffectiveDemand:
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AccordingtoKeynes,thelevelofemploymentintheshortrundependsonaggregate
effectivedemandforgoodsinthecountry.Greatertheaggregateeffectivedemand,the
greaterwillbethevolumeofemploymentandviceversa.AccordingtoKeynes,the
unemploymentistheresultofdeficiencyofeffectivedemand.Effectivedemandrepresents
thetotalmoneyspentonconsumptionandinvestment.Theequationis:
Effectivedemand=NationalIncome(Y)=NationalOutput(O)

Thedeficiencyofeffectivedemandisduetothegapbetweenincomeandconsumption.
Thegapcanbefilledupbyincreasinginvestmentandhenceeffectivedemand,inorderto
maintainemploymentatahighlevel.
AccordingtoKeynes,thelevelofemploymentineffectivedemanddependsontwofactors:
(a)Aggregatesupplyfunction,and
(b)Aggregatedemandfunction.
(a)Aggregatesupplyfunction:
1.AccordingtoDillard,theminimumpriceorproceedswhichwillinduceemployment
onagivenscale,iscalledtheaggregatesupplypriceofthatamountof
employment.
2.Iftheoutputdoesnotfetchsufficientpricesoastocoverthecost,the
entrepreneurswillemploylessnumberofworkers.
3.Therefore,differentnumbersofworkerswillbeemployedatdifferentsupplyprices.
4.Thus,theaggregatesupplypriceisascheduleoftheminimumamountofproceeds
requiredtoinducevaryingquantitiesofemployment.
5.Wecanhaveacorrespondingaggregatesupplypricecurveoraggregatesupply
function,whichslopesupwardtoright.
(b)Aggregatedemandfunction:
1.Theessenceofaggregatedemandfunctionisthatthegreaterthenumberof
workersemployed,thelargertheoutput.Thatis,theaggregatedemandprice
increasesastheamountofemploymentincreases,andviceversa.
2.Theaggregatedemandisdifferentfromthedemandforaproduct.Theaggregate
demandpricerepresentstheexpectedreceiptswhenagivenvolumeof
employmentisofferedtoworkers.
3.Theaggregatedemandcurveoraggregatedemandfunctionrepresentsaschedule
oftheproceedsoftheoutputproducedbydifferentmethodsofemployment.
DeterminationofEquilibriumLevelofEmployment:

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1.Intheabovediagram,AScurveshowsthedifferenttotalamountswhichallthe
entrepreneurs,takentogether,mustreceivetoinducethemtoemployacertain
numberofmen.IftheentrepreneursareconvincedtoreceiveOCamountofmoney,
theywillemployON1numberoflabour.
2.TheADcurveshowsthedifferenttotalamountswhichalltheentrepreneurs,taken
together,expecttoreceiveatdifferentlevelsofemployment.IftheyemployedON1
levelofemployment,theyexpecttoreceiveONamountofproceedsfromthetotal
output.
3.AtON1levelofemployment,theeconomyisnotinequilibrium.Becausethetotal
expectedamountisgreaterthanthetotalamountpaid:
OH>OC
4.TheequilibriumlevelofemploymentisON2,asatthispointtheADcurveintersects
theAScurveortheADisjustequaltoAS.Theamountofproceeds,i.e.,OMwhich
entrepreneursexpecttoreceivefromprovidingON2numberofjobsisjustequalto
theamounti.e.OMwhichtheymustreceiveiftheemploymentofthatnumberof
workersistobeworthwhilefortheentrepreneurs.
5.Ifthesituationissuchthatthetotalamountofmoneyexpectedtobereceivedfrom
thesaleofoutputexceedstheamountthatisconsiderednecessarytoreceive,there
willbecompetitionamongtheentrepreneurstooffermoreemploymentandthus,the
employmentwillincrease.OntheleftofN2,ADisgreaterthanAS,i.e.,theamount
expectedtobereceivedisgreaterthantheamountconsiderednecessary,therewill
becompetitionamountentrepreneurstoemploymorelabour.
6.BeyondtheN2,theADcurveliesbelowAScurve,whichmeansthattheamount
expectedbytheentrepreneursislessthattheamounttheyconsiderednecessaryto
receive.Therefore,thenumberofpersonsemployedwillbereducedintheeconomy.
7.TheslopeofAScurve,atfirstrisesslowlyandthenafterapointitrisessharply.It
meansthatatbeginningasmoreandmoremenareemployed,thecostofoutput
risesslowly.Butastheamountreceivedbytheentrepreneursincreasestheyemploy
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moreandmoremen.AssoonastheentrepreneursstartgettingOTamount,theywill
bepreparedtoemployalloftheworkers.
8.TheADcurve,inthebeginning,risessharply,butitflattenstowardstheend.This
showsthatinthebeginningasmoremenareemployed,theentrepreneursexpectto
getsharplyincreasingamountsofmoneyfromthesaleoftheoutput.Butafter
employmenthassufficientlyincreased,theexpectedreceiptsdonotrisesharply.
9.Effectivedemandisthataggregatedemandpricewhichbecomeseffectivebecause
itisequaltoaggregatesupplypriceandthusrepresentsapositionofshortrun
equilibrium.
10.Effectivedemandalsorepresentsthevalueofnationaloutputbecausethevalueof
nationaloutputisequaltothetotalamountofmoneyreceivedbytheentrepreneurs
fromthesaleofgoodsandservices.Themoneyreceivedbytheentrepreneursfrom
thesaleofgoodsisequaltothemoneyspentbythepeopleonthesegoods.Hence
theequationis:
Effectivedemand=Nationalincome
=Valueofnationaloutput
=Nationalexpenditure
=Expenditureonconsumptiongoods+Expenditureon
investmentgoods
11.Itisnotnecessarythattheequilibriumlevelofemploymentisalwaysatfull
employmentlevel.EqualitybetweenADandASdoesnotnecessarilyindicatethefull
employmentlevel.Itcanbeinequilibriumatlessthatfullemploymentoranunder
employmentequilibrium.
12.Actuallythereisalwayssomeunemploymentintheeconomy,evenineconomically
advancedcountries.
13.AccordingtoKeynes,fullemploymentisthelevelofemploymentbeyondwhich
furtherincreasesineffectivedemanddonotincreaseoutputandemployment.
14.AtthepointofintersectionofASandAD,theentrepreneursaremaximisingtheir
profits.Theprofitwillbereducedifvolumeofemploymentismoreorlessthatthis
point.Evenifthepointdoesnotrepresentfullemployment.
15.ADandASwillbeequalatfullemploymentonlyiftheinvestmentdemandis
sufficienttocoverthegapbetweentheASpriceandconsumptionexpenditure.The
typicalinvestmentfallsshortofthisgap.HencetheADcurveandAScurvewill
intersectatapointlessthanfullemployment,unlessthereissomeexternalchange.

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16.Intheabovediagram,inthissituationofaggregatesupply(AS),ONnumberofmen
wereseekingemployment,whereasonlyONnumberofmencouldsecure
employment.
17.Inthissituation,theeconomyhasnotyetreachedthefullemploymentlevel,and
therearestillNNnumberofworkersunemployedintheeconomy.
18.IfthefavourablecircumstancespushtheeconomyandtheADincreasessomuch
thattheentrepreneursnowfinditworthwhiletoemployONmenattheequilibrium
pointE,wheretheeconomyisinfullemploymentlevel.
19.Thesituationinwhichtheeconomyisinequilibriumattheleveloffullemployment
iscalledtheoptimumsituation.
20.TherootcauseoftheunderemploymentequilibriumisthedeficiencyofAD.This
deficiencyisduetothefactthatthereisagapbetweenincomeandconsumption.As
incomeincreasesconsumptionincreasesbutnotproportionately.Iftheinvestmentis
increasedsufficientlytocoverthisgap,therecanbefullemployment.Hencethegap
betweenincomeandconsumptionandinsufficiencyofinvestmenttothisgapare
responsibleforunderemploymentequilibrium.
ComparisonbetweenClassicalandKeynesTheories:
(a)Equilibriumatfullemployment:

(i)Accordingtoclassicaltheory,theeconomycanonlybeinastateof
equilibriumatfullemploymentlevel.Anydeviationfromfullemploymentwould
beofshortperiod.

(ii)Keynestheoryisoftheviewpointthataneconomycanbeinequilibriumeven
atlessthanfullemploymentlevel.Thereisasmallpossibilityoffullemployment
inacountry.

(b)Macrovs.Micro:

(i)Theclassicaleconomictheorydealtwithindividualaspectsoftheeconomy,
andrelatestomicroeconomics.

(ii)Keynestheoryrelatestomacroeconomicswhichstudiestheeconomyasa

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whole.
(c)Aggregatesvs.Innumerabledecisions:

(i)Theclassicaleconomictheorystudiestheeconomicsystemintermsof
innumerabledecisionmakingunits,forexample,producersequilibriumand
consumersequilibrium.

(ii)Whereas,theKeynestheorydealswithaggregates,forexample,aggregate
supplyandaggregatedemand.

(d)Wagesandemployment:

(i)Classicaleconomistsbelievedthatastateoffullemploymentcouldbe
broughtaboutthroughcutsinmoneywages.

(ii)AccordingKeynes,loweringwageswillreducetheaggregateincomeandso
effectivedemandwhichinturnreducethelevelofemploymentinaneconomy.

(e)Interest:

(i)Accordingtoclassicaltheorists,interestistherewardforwaitingorfortime
preference.

(ii)AccordingtoKeynes,interestisarewardforpartingwithliquidity.

(f)Rateofinterest:

(i)Accordingtoclassicaltheory,therateofinterestisdeterminedbythe
interactionofsavingsandinvestment.

(ii)AccordingtoKeynesiantheory,therateofinterestisdeterminedatdifferent
levelsofincome.

(g)Staticsvs.Dynamics:

(i)Theclassicaltheoryisbasedontheconceptionofstaticeconomy.

(ii)TheKeynesiantheoryisbasedontheconceptionofdynamiceconomy.

(h)Fullemploymenttheoryvs.Generaltheory:

(i)Theclassicaltheoryrelatesonlytofullemployment.

(ii)TheKeynesianapproachisageneraltheorywhichhasaverywide
applicationatallsituations,i.e.,unemployment,partialemploymentandnearfull
employment.

(i)Theoryofmoneyandprices:

(i)Theclassicaleconomistshadsegregatedthetheoryofmoneyfromthe
theoryofvalueandoutput,anddealtwiththemasiftheyareunrelatedtoone
anotherwhichisactuallynotthecase.

(ii)Keynestheoryismorerealistic.Hehasintegratedthetheoryofmoneyand
priceswiththetheoryofincomeandemploymentinthecountry.

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(j)Budgeting:

(i)Classicaleconomistsbelievedinorthodoxfinanceandbalancedbudgets.

(ii)AccordingtoKeynesacountrysbudgetshouldreflectthefinancialsituation,
andshouldvaryinaccordancewiththerequirements.Keyneshasnot
emphasisedonbalancedbudget,becausethereareseveraldeveloping
countrieswithdeficitbudgetsdictatedbytheireconomicconditionsand
requirements.

(k)Supplyofmoney:

(i)Accordingtoclassicaleconomists,increaseinmoneysupplywouldbring
aboutinflationandshouldbecontrolledinordertoavoidtheemploymentless
thanfullemployment.

(ii)Whereas,theKeynestheorystatesthatanappropriateincreaseinmoney
supplywouldincreaseemploymentandoutputanddoesnotnecessarilybring
inflation.

(l)Generalpricelevelvs.Individualcommodityprices.
(m)Levelofemploymentinacommunityvs.Employmentofaparticularclassof
labour.
SignificanceofKeynesianTheory:
1.Keyneshasgivenanewapproach,i.e.,Macroapproachtothefieldofeconomics.
Histheoryhasseveralnames:theoryofincomeandemployment,demandside
theory,consumptiontheory,andmacroeconomictheory.Infact,hehasbrought
aboutarevolutionineconomicanalysis,oftenknownasKeynesianRevolution.
2.Keynestheoryhascompletelydemolishedtheideaoffullemploymentand
forwardstheideaofunderemploymentequilibrium.Hestatesthatemploymentlevel
intheeconomycanonlybeincreasedbyincreasinginvestment.
3.TheneweconomictoolsandtechniquesdevelopedbyKeyneshaveenabledthe
todayseconomiststodrawcorrectconclusionsontheeconomicsituationofa
country.Suchtoolsareconsumptionfunction,multiplier,investmentfunction,liquidity
preference,etc.
4.Keyneshasintegratedthetheoryofmoneywiththetheoryofvalueandoutput.
5.Keyneshasfirsttimeintroducedadynamiceconomictheory,inordertodepict
morerealisticsituationoftheeconomy.
6.Healsostatesthereasonsofexcessordeficiencyofaggregatedemandthrough
inflationaryanddeflationarygapanalysis.
7.Keynestheoryisageneraltheoryandtherefore,canbeappliedtoalltypesof
economicsystems.
8.Keynesinfluencedonpracticalpoliciesandcriticisedthepolicyofsurplusbudget.
Headvocateddeficitfinancing,ifthatsitedtheeconomicsituationinthecountry.
9.Keyneshasemphasisedonsuitablefiscalpolicyasaninstrumentforchecking
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inflationandforincreasingaggregatedemandinacountry.Headvocatedextensive
publicworkprogrammesasanintegralpartofgovernmentprogrammesinall
countriesforexpandingemployment.
10.Headvisedseveralmonetarycontrolsforthecentralbank,whichinturnwillactas
theinstrumentofcontrollingcyclicalfluctuations.
11.Keynesiantheoryhasplayedavitalroleintheeconomicdevelopmentofless
developedcountries.
12.Herejectedthetheoryofwagecutasameansofpromotingfullemployment.
13.Keynestheoryhasgivenrisetotheimportanceofsocialaccountingornational
incomeaccounting.
CriticismonKeynesTheory:
1. AccordingtoSchumpeter,theKeynestheoryisadepressiontheory,whichhas
limitedapplications.
2. SomesocialistorcommunisteconomistshadsaidthatKeynestheoryisdeadif
communismcomes.However,eventhesocialistcountrieshavestrivedtoraisetheir
nationalincomebyusingKeynesiantheory.
3. Keynesiantheoryisnotasmuchdynamicanditmaymoreproperlybecalled
comparativestatics.
4. Keynesiantheoryhasignoredmicroanalysisandisnothelpfulinthesolutionofthe
problemsofindividualfirmsandconsumers.
5. Keyneshasnotgivenanyplacetotheacceleratorprinciple.
6. Itpaysexcessiveattentiontomoneyineconomicanalysis.
RelevanceofKeynesTheorytoLessDevelopedCountries(LDCs)(Extended
Criticism):
1. TheKeynesiantheoryisprimarilyforfightingdepression.Theassumptionson
whichKeynesiantheoryisbasedare:
(a)Themultiplier,and
(b)Shorttermanalysis.
2. Intheshorttermanalysis,Keynesassumesthatcapitalequipment,technology,
organisation,labourandtheirefficiencyremainsconstant.Hethinksthatthe
problemsrelatingtoemploymentindevelopedcountriesarisesonlyonaccountofthe
deficiencyofdemand.
3. ButtheproblemincaseofLDCsistoincreasecapitalequipment,toimprove
technologyandlabourefficiency.Solvingthisproblemwilltakealongprocessit
cannotbesolvedinshortrun.
4. ThedevelopingcountrieslikePakistanandIndia,thebasiccauseofunemployment
islowrateofsavingsandinvestment.
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5. MostoftheLDCsareagriculturistsandtheKeynesianapproachisindustry
oriented.Therefore,increaseinnationalincomebydeficitspendingwillleadto
increaseindemandforfood.Thiswillraisethepricesoffoodgrains.Therefore,
heavyrelianceonKeynesianapproachcouldmisleadtheeconomists,andcanplunge
theeconomyintoinflationaryspiral.
6. TheprincipleofmultiplierdoesnotmuchworkinLDCs.Supposenew
investmentsaremadeinthecountry,increasedinvestmentwillleadtothe
establishmentofnewfactories,workerswillgetemployed,incomewillincrease,
demandwillincrease,butitdoesnotguaranteetheincreaseinthesupplyofgoods
becausethereisnoexcesscapacity,andthesupplyofproductivefactorsisnot
elastic.Increasedincomewillbeabsorbedinhighprices.
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