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MacroBDocument.pdf

MacroBDocument.pdf - (a State the main criticisms which...

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(a) State the main criticisms which Keynes made of "classical" theory. (javier) Criticism # 1. Keynes Rejected the Fundamental Classical Assumption of Normal, Automatic Full Employment Equilibrium in the Economy: In a capitalist economy, keynesian view booms and depressions as normal situations of the economy. Investments are not only inadequate but also fluctuates. Keynes also believe the existence of equilibrium of the economy is less than full employment in the normal state. Full employment is only an exception. Keynes also felt colossal waste of resources due to fluctuations in output and employment in an economy as a whole. Which summarize that unemployments results in wastage of time, money , and energy. Criticism # 2. Inevitability of State Intervention: Due to the logic of underemployment equilibrium, government intervention is a must in times of depression and inflation both for efficiency and stability . The government has many options. The state may directly invest to raise the level of economic activity or to supplement deficient private investment. It may pass legislation recognising trade unions, fixing minimum wages and providing relief to workers through social security measures. Also, private enterprise economy may slump and only be remedied by public investment and other fiscal measures. State intervention will save capitalism from recurring crisis of depressions and booms. Keynes did not agree with Pigou’s idea that “ frictional maladjustments alone account for failure to utilise fully our productive power”. The capitalist system is such that left to itself it is incapable of using its productive power fully. Criticism # 3. Keynes Refuted the Say’s Law of Markets with the help of his Theory of Effective Demand
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As Say’s Law blindly assume that supply always creates its own demand and affirmed the impossibility of general overproduction and disequilibrium in the economy. Keynes felt it is unreal and not warranted by facts. For example, in a free enterprise economy, supply does not automatically create enough demand within the economy. Keynes refuted that not all savings are automatically invested, such as money saved in people's homes and not in the banks. These monies are not utilized for investment purposes as they cannot be used by other people or products. Some forms of monies are hoarded by everyday people. This removes money from the circulation of Say's law thus income is not automatically spent at a rate where all factors of production is employed. Criticism #4. No Automatic Working of the Price Mechanism: Keynes do not agree that laissez faire policy is automatic and self-adjusting for achieving employment equilibrium.There are two principal class, one is that the rich have wealth but they do not spend all of it and second is that the poor have no wealth to spend on consumption. Also during boom times, the income of the rich rise more than the incomes of the poor.
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