Question

what is mean by the effective demand principle in Keynesian theory employment ? discuss using a schedule or diagram ​

Answer 1

He claimed his theory to be ‘general’, i.e., applicable at any point of time. That is why he christened his epoch-making book: The General Theory of Employment, Interest and Money (1936). Thus, Keynes’ theory is “general”. In this book, he not only criticised the classical macroeconomics, but also presented a ‘new’ theory of income and employment. He is often described by economists as a revolutionary one in the sense that it was Keynes who salvaged the capitalist economy from destruction in the 1930s. Critics, however, label him as a ‘conservative revolutionary’.

Keynes’ theory of employment is a demand-deficient theory. This means that Keynes visualised employment/unemploy­ment from the demand side of the model. His theory is, thus, known as demand-oriented approach, as opposed to the classical supply side model. According to Keynes, the volume of employment in a country depends on the level of effective demand of people for goods and services. Unemployment is attributed to the deficiency of effective demand.

It is to be kept in mind that Keynes’ theory is a short run theory when population, labour force, technology, etc., do not change. Once Keynes remarked that since “in the long run we are all dead”, it is of no use to present a long run theory. In view of this, one can ar­gue that the volume of employment depends on the level of national income/output. Higher (lower) the level of national output higher (lower) is the volume of employment. Thus, Keynesian theory of employment deter­mination is also the theory of income deter­mination.