Introduction to Keynesian Theory of Employment
Keynes gave Keynesian Theory in his volume “General Theory of Employment, Interest, and Money” He not only criticized the Classical Theory of Employment but also analyzed those factors that affect the employment and production level of an economy. Most of the modern economists agree with the concept of Keynes. The Keynesian Theory of Employment is a product of the worldwide depression of 1931-36. Due to this depression, unemployment spread in all independent capitalist economies. Keynes analyzed the situation of unemployment and tried to find the reason and solution to that problem.
During that time, the theories of British economist John Maynard Keynes—deficit-based, government stimulus spending, and strong regulation of markets—dominated economic policy and thought.
Explanation of the Theory of Employment
“Classical theory of Employment” also analyzed those factors that affect the employment and production level of an economy. Most of the modern economists agree with the concept of Keynes. The Keynesian Theory of Employment is a product of the worldwide depression of 1931-36. Due to this depression, unemployment spread in all independent capitalist economies. Keynes analyzed the situation of unemployment and tried to find the reason and solution to that problem.
According to this theory, since the demand for goods and services does not meet the total actual resources that may be utilized, unemployment arises. In the words of Keynes,
The deficiency in effective demand, stops the increase in employment to reach the full employment level.
With an increase in the effective demand of consumers, the resources are utilized in massive quantities, and the level of employment rises. When people start demanding another product in place of a product temporarily, unemployment would increase due to a fall in total demand, it shall be of an irregular nature. A permanent fall in demand occurs when instead of making expenditures on consumer goods, people try to save most part of their incomes. A deficiency in demand for goods and services in one sector of society is not compensated by an increase in demand for goods and services in another sector, and total demand declines.
Deficiency, Demand, and Employment – Keynesian Theory
If the desire to save from their income is more than the desire for substitution expenditure has become a reverse relationship, demand, and employment increase i.e., when the desire to save, among people is lesser than the substitution expenditure in the society, demand, and employment increase.
In Keynes’s view, the level of employment of any country depends on its effective demand. Effective demand depends on the total supply of production and the total demand. The total supply of production depends on total investment and total consumption. The amount of consumption is affected by the tendency for consumption, and the size of national income. As the income of a person increases, his tendency to consume comparatively reduces. On the other hand, it depends on the amount of investment, the rate of interest, and mostly on the marginal efficiency of capital. In the money market, the demand for capital shall be more even during the period of high rates of interest, if in view of the investors, capital is more efficient. The marginal efficiency of capital depends on the substitution cost and the anticipated profits.
Reasons for the Spreading of Unemployment
According to Keynes, the three main reasons for the spreading of unemployment are:
- Lack of effective demand
- Deficiency of outlay on consumption
- Deficiency of investment
Read about Unemployment in India