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National Income Definition 3. Use of the Wage Unit 4. Simple Income Determination 7. The Two Approaches to Income Determination 8. Limitations of the Keynesian Theory. When most countries of the world were experiencing the gravest depression of the last two hundred years — that is, the so- called Great Depression of economists of the time faced a challenge in the problem of increasing unemployment, shrinking national income, falling prices and failing firms.
It was a man-made calamity, a situation of poverty amidst plenty. Machines, workers and raw materials were available for production but were not being used simply because the employers feared losses in the production of goods. It seemed clear that there was something seriously wrong with the capitalist way of economic organisation.
Most governments were helpless spectators to the deepening economic crisis because the economic advisers would not suggest any economic measures of state intervention in the economy. The conservative economists liked to wait for the free- economic system to correct its ailment itself but they could not specify for how long.
The policy recommendations he made were not entirely new but the theoretical justification he gave for them was remarkable. He advocated the policy of starting public works and financing them with fiat money with an unbalanced budget.
Wherever these policies were adopted, recovery was remarkably rapid. It was a passion with the young economists and a problem with the traditional economists. The book has proved revolutionary in the sense that it has left its imprint on all branches of economic theory.
We shall study, in a summary form, the main ideas of the theory. The most important difficulty which Keynes faced in building a Theory of Employment for the economy as a whole was the definition of national income which could be related to national employment.
He solved this problem in his own way. Keynes wanted to choose the most suitable definition for this particular purpose. Marshall in his Principles of Economics had defined national income as follows: Pigou has tried to limit down the concept so as to make it practicable.
Pigou, only those goods and services should be included double counting being avoided that are actually sold for money. The bought and the un bought do not differ in kind from one another in any fundamental respect.
In a country where most of the goods and services are not exchanged for money, i. Fisher adopted consumption instead of production as the basis of measuring the national dividend.
Only the services, rendered to use during this year by these things are income. But it is more difficult to have an idea of net consumption than net production. Moreover, the lives of durable goods which last beyond one year are very difficult to measure. Estimates are at best estimates and they can at times differ from the actual.
None of these definitions suited Keynes as he wanted to know the factors that go to determine the level of income and employment in an economy at a particular time. He wanted to know the considerations that weigh with entrepreneurs when they decide to employ certain number of men.
However, it may be noted that the suitability of any particular definition depends upon the purpose for which it is to be used. Keynes defined income in such a manner as enabled him to determine employment in the community. It is in this respect that his definition differed from those of his predecessors.
Earlier definitions did not throw any light on the factors which go to determine income or its relation with employment; this purpose was amply achieved in the definition adopted by Keynes. It is the cost of using capital equipment rather than of leaving it idle.
User Cost is the difference between the depreciation in the value of the machine when it is put to use and the depreciation which would occur if not in use plus the expenditure incurred on its maintenance and upkeep.
For example, a machine worth Rs. Even if the machine were not put to use, it would have suffered a loss of value on account of say rusting etc. But in this case the value of the machine has been maintained at Rs.
Thus, the user cost would be Rs.In The General Theory, Keynes advances what has been described as a neomercantilist case about the importance of a nationally organized marketplace.
In fact, Keynesian theory assumes not just a marketplace but an economic community. Keynesian theory was mainly concerned with cyclical unemployment which arose in industrialised capitalist countries especially in times of depression. During the period of Greet Depression (), the developed capitalist countries faced a drastic fall in GNP resulting in severe unemployment.
A similar analysis was repeated in chapter 23 of the General Theory, which related increasing costs and prices to a deteriorating trade balance. In an open economy, the behavior of relative money wages is related to employment, via the balance of trade and investment (Keynes , –63).
Why Keynes is important today Peter Temin, David Vines 14 November The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. Multiple schools of economic thought that trace their legacy to Keynes currently exist, the notable ones being Neo-Keynesian economics, New Keynesian economics, and Post-Keynesian economics.
Keynes's biographer Robert Skidelsky writes that the post-Keynesian school has remained closest to the spirit of Keynes's work in following his . In conclusion, the theory of Keynesian Economics was an extremely important part of the history of the economy.
This theory was an enormous part of the end of the Great Depression. It also was a key in giving an explanation to the various changes in the economy, such as slumps and recessions.