Criticism of Classical Theory
The classical theory of employment is criticized on the following grounds:
(1) Equilibrium Level need not be Full Employment Level. At the equilibrium level, it is not necessary that full employment may be attained. Aggregate demand may be equal to aggregate supply at less than full employment level.
Keynes called it ‘under-employment equilibrium’. He points out that all the factor income generated during the process of production need not be spent on consumption. A part of the factor income may be saved. Unless the investors are willing to invest an amount equivalent to the amount of saving, the total expenditure will not be equal to total output available for sale.
(2) Rate of Interest is not the true Determinant of saving and investment are the functions of the rate of interest, and therefore, equality between saving and investment can be attained though changes in the rate of interest.
(3) Theory is applicable only in the long run. Full employment equilibrium in the classical system is attained in the long run. But, according to Prof. Keynes, “in the long run we all dead, and after death, there is no economic or non-economic problem.”
(4) Employment and output are not the function of way rate. Classical thinkers believed that the level of employment and income can be raised by curtailing the wage rate. But, accounting to Keynes, employment is not a function of wage rate but of effective demand.
(5) Existence of over-production or under-production cannot be overruled. The classical assumption of no general glut (over-production) or under-production is also unrealistic.
(6) Full employment is not a normal situation. The classical assumption of full employment as a normal situation is also unreal. According to Keynes, unemployment is a general situation and full employment is a rare exception. Full employment is an ideal situation which can rarely be attained by an economy.
The weaknesses of the classical theory of employment compelled Prof. J.M. Keynes to develop a new theory of employment.
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