Evaluation of Keynesian system
Answers
Answer:
Keynes wrote the ‘General Theory’ is not easy. Perilous as the task may be, it will be interesting to attempt it ! As such those basic theories of Keynes which will remain a part of the stream of economic thought must be separated from the theories which are invalid or based on fallacy. He also feels that the unit of analysis must be the individual commodity or commodities grouped in some manner. Many wanted complete socialism to cure the maladies. Keynes wanted to preserve capitalism and was ready to do whatever seemed necessary to stem the tide. As such, he was a man in great hurry. That was why he took the degree of consumption—or monopoly and social organisation—as given and presumed short-run. what it includes, then as to what it omits. Another group of critics points to Keynes’ failure to take account of Pigou Effect (real balance effect) and continues to harp upon the impossibility of less than full employment equilibrium if wages and prices are perfectly flexible. the monetary and fiscal policies got the much needed flexibility. The huge national debt did not prove to be a curse that the old philosophy would try to make out. Yet, we are experiencing some unfortunate by-products, which should cause us to re-examine thesis—that a chronic deficit with a secular increase in public debt is in no sense an alarming matter. Even though the debt may be internally held it has some irksome implications. This is because the public debt is monetized. Therefore, the greater the deficit, the faster we add to the supply of money. But if money increases faster than economic growth we get inflation. But it served as an excellent base for dynamic income growth analysis. Contemporary theories on trade cycle are a dynamised Keynesian model with refinements here and there. This has led to the use of differential equations calculus that Keynes carefully avoided to make his theory intelligible to non-mathematical readers. The concept of ‘foreign trade multiplier’ and the use of ‘income elasticity of demand’ are the direct outcomes of the shift in emphasis from ‘price’ to ‘income’ international trade analysis. Bretton Woods Agreement and the establishment of International Monetary Fund and World Bank would be remembered as positive proofs of his influence in the sphere of international finance. In fact, there is hardly any branch of modern economics in which the impact of Keynesian economics is not there. Keynes’ economics has not only been extended but his major premises themselves have been subjected to empirical analysis. Thus, the task of perfecting the General Theory and making it more general is well on its way and we have had considerable success. Those who criticize the generality of the ‘General Theory’ on the ground that it is not applicable ‘anywhere’—less so in underdeveloped economies—would, according to Schumpeter, better not waste their time on the ‘General Theory’ ; for a more general theory than the ‘General Theory’ of Keynes has yet to evolve. Of course, Keynes was not the irst to stress the importance of effective demand but it was he who repudiated the Say’s law through it and it was his analysis that did enter the stream of economic thought and that will remain. Virtually, all seem to agree that consumption function is one of Keynes’ greatest contributions along with his emphasis on underemployment equilibrium. According to Keynes, the value of any asset is the discounted present worth of future expectations. This basic idea led to his magnificent treatment of the marginal efficiency of capital. Investors will invest if, and only if, the expected rate of return on capital is equal to or greater than the going rate of interest. This, of course, is New Economics indeed.
Conclusion:
It is vitally important that all systems of economic thought be studied with care. None is wholly invalid, whether it be mercantilism, classical economics, the historical school, the Austrian School or Keynesian economics. Each has made its contribution to economic thought and every economist should be familiar with the basic tenets of each system. While attempts were going on to extend and modify Keynes’ ideas many under-developed countries started a conscious and state directed attempt at of development of their economies. A relevant question raised was whether it was possible to make use of Keynesian analysis, ideas and policies for theory and policy of development of these economies. It was Mrs. Joan Robinson who first suggested their use in the context of planning for development in underdeveloped economies. It has been contended that any attempt to apply Keynesian remedies to these economies is not only frustrating but even harmful to the efforts at development. These conditions are generally prevalent in advanced capitalist economies.