Critique of Keynesian Economic Theory
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LIMITATIONS OF KEYNES’ THEORY
Keynes’ theory of employment and
income was greatly admired as a major
break-through in the aggregative
economics. Yet it has been subjected to
severe criticism by various writers.
The main limitations of Keynesian
economics in general and his theory of
income and employment in particular
are stated below:
1. Contradiction between equilibrium
and unemployment:
Keynes asserted in his ‘General Theory’
that greater probability was that the
economic system could be in equilibrium
in a less than full employment (or
unemployment) situation.
According to critics, underemployment
and equilibrium are contradictory. If
there is unemployment, equilibrium
cannot exist.
2. Neglect of long period:
Keynes dismissed the long period on
account of uncertainty associated with
it. He was greatly pre-occupied with the
short run period.
According to critics, the economic
analysis should be capable of analysing
the economic problem both in the
context of short and long periods.
3. Assumption of perfect competition:
Like classical writers, Keynes too
assumed the existence of perfectly
competitive market.
Perfect competition, however, is a
completely unrealistic and imaginary
market situation.
4. Assumption of closed economy:
Keynes’ “General Theory” was built in a
closed two-sector economic system. It
implies that the aggregate demand is
not affected by variations in exports and
imports and international capital flows.
But this is not true. In actual reality, the
economic system is open.
5. Not dynamic:
Since Keynes introduced expectations in
his analysis, it was claimed that his
theory was dynamic. In fact, Keynes’
approach was concerned with shifting
equilibrium or comparative statics.
The comparative statics is a special case
of static theory. It is not the dynamic
analysis proper.
6. Lack of generality:
It was claimed that Keynes gave a
general theory of income and
employment. In contrast, the classical
theory was applicable only in the
situation of full employment.
The critics have taken a serious
objection to this Keynesian claim.
Keynes’ analysis is applicable to the
conditions of advanced countries. It is
not relevant to less developed countries.
7. Excessively aggregative:
Keynes laid emphasis upon the macro or
aggregative variables like aggregate
demand, aggregate supply, national
income, consumption, investment and
saving.
In this analysis, the micro quantities
were completely ignored. The excessive
emphasis upon aggregates resulted in
the neglect of particular units or the
composition of those aggregates.
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Keynesian economic theory, though groundbreaking, faces several limitations. These include contradictions between equilibrium and unemployment, neglect of long-term analysis, assumptions of perfect competition and a closed economy, lack of generality, and a static rather than dynamic focus. Critics argue that Keynes' analysis may not be universally applicable, particularly to less developed countries.
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Presentation Transcript
LIMITATIONS OF KEYNES THEORY Keynes theory income was greatly admired as a major break-through in economics. Yet it has been subjected to severe criticism by various writers. The main limitations economics in general and his theory of income and employment in particular are stated below: of employment and the aggregative of Keynesian
1. Contradiction between equilibrium and unemployment: Keynes asserted in his General Theory that greater probability was that the economic system could be in equilibrium in a less than full employment (or unemployment) situation. According to critics, underemployment and equilibrium are contradictory. If there is unemployment, cannot exist. equilibrium
2. Neglect of long period: Keynes dismissed the long period on account of uncertainty associated with it. He was greatly pre-occupied with the short run period. According to critics, analysis should be capable of analysing the economic problem context of short and long periods. the economic both in the
3. Assumption of perfect competition: Like assumed competitive market. Perfect competition, completely market situation. classical the writers, existence Keynes of too perfectly however, and is a unrealistic imaginary
4. Assumption of closed economy: Keynes General Theory was built in a closed two-sector economic system. It implies that the aggregate demand is not affected by variations in exports and imports and international capital flows. But this is not true. In actual reality, the economic system is open.
5. Not dynamic: Since Keynes introduced expectations in his analysis, it was claimed that his theory was dynamic. In fact, Keynes approach was concerned with shifting equilibrium or comparative statics. The comparative statics is a special case of static theory. It is not the dynamic analysis proper.
6. Lack of generality: It was claimed that Keynes gave a general theory employment. In contrast, the classical theory was applicable situation of full employment. The critics have objection to this Keynes analysis is applicable to the conditions of advanced countries. It is not relevant to less developed countries. of income and only in the taken Keynesian a serious claim.
7. Excessively aggregative: Keynes laid emphasis upon the macro or aggregative variables demand, aggregate income, consumption, investment and saving. In this analysis, the micro quantities were completely ignored. The excessive emphasis upon aggregates resulted in the neglect of particular units or the composition of those aggregates. like supply, aggregate national
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