Keynes Theory of Income and Employment Essay

The term undefiled economists was firstly used by Karl Marx to describe economic thought of Ricardo and his predecessors including Adam Smith. However, by serious music 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 received, by and large, by the good kn cause 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 system of transaction were (a) The assumption of complete employ of labour and some other cultivatable resources, and (b) The flexibleness of prices and remuneration to bring some the full mesh (a) Full employment- According to classical economists, the labour and the other resources atomic number 18 unendingly fully emplo yed. Moreover, the general over- outturn and general unemployment are assumed to be impossible. If in that location is any unemployment in the country, it is assumed to be temporary or abnormal.According to classical hitchs of employment, the unemployment lowlifenot be persisted for a huge 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- take resulting in depression and unemployment, prices would fall as a result of which strike would increase, prices would tog out and productive activity forget be stimulated and unemployment would tend to dis reckon.Similarly, the unemployment could be cured by let downting down wages which would increase the submit for labour and would stimulate activity. Thus, if the prices a nd wages are allowed to move lightenly, unemployment would disappear and full employment level would be persistored. studys honor- 1. judges Law is the foundation of classical economics. Assumption of full employment as a normal condition of a free foodstuff economy is justified by classical economists by a law of nature 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, supply creates its own take on. 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 sum centre demand. 5. The conceived Says Law describes an important fact about the work of free-exchange of economy that the main source of demand is the sum of incomes earned by the v arious productive factors from the process of production itself.A new productive process, by paying out income to its employed factors, generates demand at the equal time that it adds to supply. It is thus production which creates market for goods, or supply creates its own demand not only at the same time further alike to an equal extent. 6. According to Say, the essence supply of commodities in the economy would be exactly equal to sum 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 spending so as to keep all resources fully employed. most of the income is fagged on consumer goods and a par of it is relieve. 8. The classical economists are of the view that all the savings are spent automatically on investment goods. nest egg and investments 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 partly for consumption and partly for investment. 10. If there is any gap mingled with saving and investment, the rate of interest brings about equality between the two. fundamental Assumptions of Says Law- (a) Perfectly competitive market and free exchange economy. (b) Free flow of money incomes. All the savings mustiness 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 government 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 wor ldwide economic depression in the decade forward World War II. The timing of the Great Depression varied crossways nations, but in most countries it started in about 1929 and lasted until the late mid-thirties or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century. In the twenty-first century, the Great Depression is commonly used as an example of how far-off the worlds economy can decline. The depression originated in the U. S. , starting line with the fall in stock prices that began around September 4, 1929 and became worldwide intelligence activity with the stock market crash of October 29, 1929.From there, it quickly spread to almost any 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 gear as 33%. British economist John Maynard Keynes argue d in world-wide system of vocation 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 residual at low levels of economic activity and high unemployment. Keynes basic idea was truthful 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 multiplication 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 spend 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 overrun 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 commute depression. Saving investment equality-The Says Law assumes that small economic analysis can profitably by by utilize 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 analysis is required. Saving investment equality-Keynes was neer convinced of the classical version that interest elasticity can consider savings ad investment. Accor ding to him, It is the income not the rate of interest which is the equilibrium force between saving and investment. Monopoly element-Says Law assumes perfect competition in the economy. Keynes says It is the imperfect completion which in perpetrate prevails in the product and factor market. Role of Trade unions-In the coeval capitalistic world, The trade unions bargain with the employers for the fixation of wages. The state also fixes lower limit 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 widely accepted by modern economists. Keynesian economics is also known as new economics and economic revolution. description-In short period, level of topic income and so of employment is primed(p) by aggregate de mand and aggregate supply in the country. intensity of employment depends on the level of national income 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.