Criticisms of Keynesian Theory of Employment

Keynesian theory of employment is considered as superior to the classical theory, because Keynesian theory of employment is more scientific and practical to classical theory. Despite this, there are many drawbacks in the Keynesian theory of employment. Economists like Miser, Hayck, Knight, K.K. Kurihara, etc, have criticized the Keynesian theory vary strongly. Some of the criticisms are as follows:

(1) Ignorance of micro-economic Theories:

Keynesian theory of employment is based on macroeconomic phenomenon. It neglects interrelationship between micro and macro economics. All the macroeconomic variables are depending on microeconomics. So, the study of macroeconomics will not be completed without the study of microeconomics.

(2) Unrealistic Assumptions:

Keynesian theory of employment is based on the unrealistic assumption of perfect competition, closed economic system and short-run analysis, etc. But in any capitalistic economy, monopoly and oligopoly exists rather than perfect competition. Therefore, Keynesian theory of employment is unrealistic and impractical.

(3) Employment may not always Increase as Investment Increase:

         J.M. Keynes considered that level of income and employment is highly influenced by investment. But in reality, employment level is highly affected by the marginal propensity to consume. But Eeynes, in the short-run has taken marginal propensity to consume as constant. That is, he has not taken the marginal propensity to consume as the factor determining the level of employment.

(4) No direct relationship between employment and effective demand:

         Keynesian theory of employment explains that there is functional relationship between employment and effective demand, i.e., higher the effective demand higher will be the level of employment and vice-versa. But in reality, employment level is highly influenced by supply of money, prices of goods, elasticity of labour and economic development of an economy.

(5) Static in Nature:

            Keynesian theory of employment has not given a thought to time-lags. Keynes was of the view that the consumption would increase as a result of the increase in income. In reality, it is appropriate to take this theory as comparative-static rather than dynamic.

(6) Fundamentally a  capitalistic theory:

Keynesian theory basically examines the determinants of employment in free market economy. Although Keynes suggests government intervention and controlled capitalism, his theory fails to deal with the socialist economic system. Therefore, Keynesian theory is known as capitalistic theory.

(7) Inappropriate in all the economics:

Keynes has taken his theory of employment as the general theory. But, this theory is not applicable in all the countries specially underdeveloped countries. This theory is only applicable in capitalistic countries like England, Japan and America (USA). This theory deals with the problem of cyclical unemployment. But, under developed countries have the problem of chronic unemployment and disguised unemployment. Hence, Keynesian theory of employment is not really general in applicable as he claimed.

Despite these drawbacks the impact of Keynes’ theory has not been able to go completely out of the world and the brain of the economists. This theory is characterized as depression economics because it was the outcome of the ‘Great Depression’ of 1930’s. Likewise, the theory of effective demand of Keynes is regarded as the origin of the modern theory of economic policy.

One thought on “Criticisms of Keynesian Theory of Employment”

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