Critically discuss the keynesian theory of employment.
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In the Keynesian theory, employment depends upon effective demand. Effective demand results in output. Output creates income. Income provides employment. Since Keynes assumes all these four quantities, viz., effective demand (ED), output (Q), income (Y) and employment (N) equal to each other, he regards employment as a function of income.
Effective demand is determined by two factors, the aggregate supply function and the aggregate demand function. The aggregate supply function depends on physical or technical conditions of production which do not change in the short-run.Since Keynes assumes the aggregate supply function to be stable, he concentrates his entire attention upon the aggregate demand function to fight depression and unemployment. Thus employment depends on aggregate demand which in turn is determined by consumption demand and investment demand.
According to Keynes, employment can be increased by increasing consumption and/or investment. Consumption depends on income C(Y) and when income rises, consumption also rises but not as much as income. In other words, as income rises, saving rises.
Consumption can be increased by raising the propensity to consume in order to increase income and employment. But the propensity to consume depends upon the psychology of the people, their tastes, habits, wants and the social structure which determine the distribution of income.
All these elements remain constant during the short-run. Therefore, the propensity to consume is stable. Employment thus depends on investment and it varies in the same direction as the volume of investment.
hope this will help you.
Effective demand is determined by two factors, the aggregate supply function and the aggregate demand function. The aggregate supply function depends on physical or technical conditions of production which do not change in the short-run.Since Keynes assumes the aggregate supply function to be stable, he concentrates his entire attention upon the aggregate demand function to fight depression and unemployment. Thus employment depends on aggregate demand which in turn is determined by consumption demand and investment demand.
According to Keynes, employment can be increased by increasing consumption and/or investment. Consumption depends on income C(Y) and when income rises, consumption also rises but not as much as income. In other words, as income rises, saving rises.
Consumption can be increased by raising the propensity to consume in order to increase income and employment. But the propensity to consume depends upon the psychology of the people, their tastes, habits, wants and the social structure which determine the distribution of income.
All these elements remain constant during the short-run. Therefore, the propensity to consume is stable. Employment thus depends on investment and it varies in the same direction as the volume of investment.
hope this will help you.
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Answer:
Keynesian theory has been criticised because, although revolutionising contemporary economic theory, his approach contains some fundamental flaws.
Explanation:
What is Keynesian Theory of Employment?
- Effective demand, according to Keynes' theory of employment, is the amount of money spent both on investment and on the consumption of goods and services.
- The overall cost is the same as the national revenue, which is the same as the national production.
- Effective demand is therefore equivalent to total spending as well as to national income and output.
Criticisms of Keynesian theory of Employment:
- It solely addresses cyclical unemployment and overlooks other types of unemployment, such as frictional unemployment, technical unemployment, etc. Keynesian theory is not a full theory of employment in the sense that it does not give a comprehensive analysis of unemployment. t doesn't explain how to obtain a complete and equitable job.
- Effective demand and employment volume do not directly and predictably relate to one another. Everything is based on the correlation between the money supply, prices, and wage rate. In addition, stagflation is a concern in most modern-day nations (i.e., unemployment with inflation).
- The perfect competition assumption made by Keynesian theory is not a particularly practical one. He gave monopolistic issues no attention at all.
- Short-term phenomena are the focus of Keynesian theory. The long-term issues with the dynamic economy are not taken into consideration.
- The nature of Keynesian economics is static. It disregards the temporal delays in how economic variables behave. The post-Keynesians, on the other hand, have filled this void by offering genuinely dynamic analysis.
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