Criticism of the Classical Theory of Income EmploymentFitness Gear & Equipment
Criticism of the Classical theory of income Employment
Keynes in his General Theory made a dynamic, assault on the classical theory of employment. He bitterly criticized Say's law, in particular the Pigovian assertion that money wage cuts would help to promote employment at a time of depression and unemployment.
We can give the main points of criticism in a summary fashion as under:
(i) Supply may not produce its own demand when a fraction of the revenue is hoarded. Total demand is not at all times equivalent to total supply.
(ii) Employment in the financial system as a whole cannot be improved by resources of a common wage slash while it may be achievable in a particular business. It is incorrect to relate micro-economic principles to macroeconomic actions or state of affairs.
(iii) They evaluated at wages only from viewpoint of employers’, i.e., the price characteristic and disregarded the revenue feature of wages. There is no straight association amid employment and wages, nor is unemployment owing to income firmness or synthetic resistances.
Keynes also opposed the classical insistence on long-term equilibrium; instead he attached greater importance to the short-term equilibrium.
Keynes also attacked the classical theory of saving and investment. He objected to the classical idea of saving and investment equilibrium through, flexible rates of interest. To him saving and investment equilibrium is attained through changes in income rather than in interest rate.
Further, Keynes criticized classical theory for its unrealistic approach to the problems of the contemporary capitalistic economic system. Pigou's plea for 'thoroughgoing competition' to solve the problem of unemployment seemed obsolete in the changed conditions in the modern world. Keynes points out those trade unions are an integral part of modern society and they will grow further. Keynes wanted governmental action to bring about adjustment in the economic system, because the economic system is not self-adjusting in character as was assumed by the classicists.
We have explained above the Keynesian theory of income and employment; it will now be proper to give an outline of the Keynesian theory of income and employment. According to this theory, employment is a function of income; the greater the national income, the greater the volume of employment. Both income and employment are determined by the level of effective demand.