Criticism of classical theory

Keynes has attacked the classical theory of employment for its unrealistic assumptions. He criticised classical theory on the following grounds:

(1)  Unrealistic assumption of full employment:

According to Keynes, in free capitalist economy under employment equilibrium are found in reality and full employment equilibrium is exception. Because in such economies investments are not only inadequate but also usually fluctuate.

(2)  Say’s law ineffective:

            Keynes criticised Say’s law of market which tells that supply creates its own demand and that there is no over production and unemployment. According to Keynes income is not automatically spent and unemployment according to Keynes is on account of future to spent current income on consumption and capital goods. In free market economy supply can’t create automatically enough demand within the economy. But actual state in such economy is fluctuating level of income, output and employment which depends upon effective demand.

(3)  Equality of saving and investment:

            According to Keynes saving depends upon not on the rate of interest but upon level of income and upon marginal efficiency of capital. A low rate of interest can’t increase investment if business expectations are low.

(4)  Pigou’s formulation hold not good:

            Keynes attacked on Pigou’s thought that a cut in money wage could achieve full employment in economy. It is applicable for a particular industry not for whole economy. If wages are reduced in economy that leads to reduction in employment as a result aggregate demand falls and it leads to decline in employment.

(5)  Long-run equilibrium:

Classical economists believe in long run full-employment equilibrium through a self adjustment process. But Keynes believed that “In the long-run we are all dead.”

(6)  Laissez-faire and self-adjustment:

            Keynes did not agree with view of the laissez-faire policy is essential for an automatic and self adjustment of full employment equilibrium. He believed that capitalist system is not self-adjusting, because in such economy, there are two classes rich and poor. Rich people do not spend whole of their income on purchase of their commodities which lacks aggregate demand and leads to over production and to depression. Keynes therefore advocated state intervention for adjusting supply and demand within the economy through fiscal and monetary measures.

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