Keynes Theory of Income and Employment Essay

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 circulate and Pigou. t exclusivelyy 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 soundly known economists by then. cosmos 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 presumptuousness of full employment of wear toss off 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 argon always fully employed. Moreover , the general over-production and general unemployment are assumed to be impossible. If at that place is any unemployment in the country, it is assumed to be temporary or ab habitual.According to classical views of employment, the unemployment can non 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 accept 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 fall by the waysidely, unemployment would disappear and full employment level would be restored. Says Law- 1. Says Law is the foundation of classical economics. Assumption of full employment as a normal condition of a free foodstuff thriftiness is justified by classical economists by a law known as Says 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. . According to the French economist J. B. Say, confer creates its own demand. According to him, it is production which creates marketplace 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 Says 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 functioning of production itself.A new productive process, by paying out income to its employed factors, generates demand at the same time that it adds to supply. It is and so production which creates market for goods, or supply creates its own demand not only at the same time but alike to an fit extent. 6. According to Say, the aggregate supply of commodities in the economy would be exactly equal to aggregate demand. If there is any deficiency in the demand, it would be temporary and it would be ultimately equal to aggregate supply. Therefore, the employment of more resources will always be profitable and will take to the point of full employment. 7.According to Says Law, there will always be a sufficient rate of total expending so as to grip all resources fully employed. Most of the income is washed-out on consumer goods and a par of it is saved. 8. The classical economists are of the view that all the savings are spent automatically on investment goods. Savings and investme nts are interchangeable words and are equal to each other. 9. Since saving is another form of spending, according to classical theory, all income is spent part for consumption and partly for investment. 10. If there is any gap between saving and investment, the rate of interest brings about equality between the two.Basic Assumptions of Says Law- (a) of a sudden competitive market and free exchange economy. (b) Free flow of money incomes. All the savings must be immediately invested and all the income must be immediately spent. (c) Savings are equal to investment and equality must bring about by flexible interest rate. (d) No intervention of politics in market operations, i. e. , a laissez faire economy, and there is no government expenditure, taxation and subsidies. (e) Market size is limited by the volume of production and aggregate demand is equal to aggregate supply. (f) It is a closed economy.The Great Depression was a severe worldwide economic depression in the decade prec eding realism War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or archean 1940s. It was the longest, most widespread, and deepest depression of the 20th century. In the 21st century, the Great Depression is commonly used as an example of how far the worlds economy can decline. The depression originated in the U. S. , starting with the fall in stock prices that began around September 4, 1929 and became worldwide news with the stock market crash of October 29, 1929.From there, it right away spread to almost every country in the world. The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped. Unemployment in the U. S. rose to 25%, and in some countries rose as high as 33%. British economist John Maynard Keynes argued in General opening of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average.In such a situation, the economy reached counterweight at low levels of economic activity and high unemployment. Keynes basic idea was simple to keep people fully employed, governments have to run deficits when the economy is slowing, as the private sector would not invest enough to keep production at the normal level and bring the economy out of recession. Keynesian economists called on governments during times of economic crisis to pick up the slack by increasing government spending and/or cutting taxes.Criticism of Keynes on Classical Theory-The law of J.B Say was finally falsified and laid to rest with the writings of Lord J.M. Keynes. He in his book, General Theory, has severally citicized the Says La on the following grounds. Posibility of defficiency of affective demand-He says that in a compatative market it is not necessory that all income earned is automatically sp end on cosumption and investment. A part of Income may be saved and may go to increase individual holdings. There may, thus appear a deficiency in aggregate demand causing overproduction and unemployment in the country. Pigous view on wage cuts-Keynes criticized the view that a general cut in real wages in times of depression is a cure for unemployment. Keynes is of the view that a general cut in real wages may reduce the aggrigate demand for goods and deepen depression. Saving investment equality-The Says Law assumes that micro economic synopsis can profitably by by applied to the economy as a whole. Keynes rejects this view and says that for the explanation of the general theory of income and employment, the macro economic outline is required. Saving investment equality-Keynes was never convinced of the classical version that interest elasticity can equate savings ad investment. According to him, It is the income not the rate of interest which is the equilibrium force between sa ving and investment. Monopoly element-Says Law assumes perfect competition in the economy. Keynes says It is the imperfect closure which in practice prevails in the product and factor market. Role of Trade unions-In the contemporary capitalistic world, The trade unions bargain with the employers for the fixation of wages. The state also fixes minimum wages in certain industries. Short run economics-Keynes says that, the lenth of long run is not clear in Says law.Keynes Theory Of Income And EmploymentJohn Maynard Keynes wrote his esteemed book General Theory of Employment in 1936. Keynes has strongly criticised the classical theory in his book. His theory of employment is astray accepted by modern economists. Keynesian economics is also known as new economics and economic revolution.Definition-In short period, level of national income and so of employment is determined by aggregate demand and aggregate supply in the country.Volume of employment depends on the level of national inco me and output. Increase in national income means increase in employmentThe equilibrium of national income occurs where aggregate demand is equal to aggregate supply. This equilibrium is also called effective demand point.