Question

State the views of Keynes regarding full employment.

Answer 1

John Maynard Keynes presented a contrasting view to the classical economists regarding full employment. In his influential work, “The General Theory of Employment, Interest and Money” (1936), Keynes argued that full employment is not a natural or automatic state of the economy, especially in the short run. His key views are as follows:

1. Possibility of underemployment equilibrium: Keynes asserted that an economy can settle at an equilibrium level below full employment, where resources, especially labor, remain underutilized. This situation arises not because workers refuse to work, but due to inadequate aggregate demand.
2. Effective demand determines employment: According to Keynes, the level of employment depends on effective demand, which is the total demand for goods and services in the economy. If effective demand is low, producers cut back on production and employment, leading to unemployment.
3. Rejection of say’s law: Keynes rejected say’s law “supply creates its own demand”. He argued that income earned is not necessarily spent entirely, as people tend to save a part of it. As a result, demand can fall short of supply, leading to unemployment. 
4. Involuntary unemployment: Keynes emphasized the existence of involuntary unemployment, where people are willing to work at the prevailing wage rate but cannot acquire jobs due to insufficient demand in the economy.
5. Role of investment and government spending: To achieve full employment, Keynes advocated for increased investment. He believed that in the short run, consumption remains stable; therefore, only an increase in investment, particularly by the government, can stimulate aggregate demand and reduce unemployment.
6. Active role of government: Unlike classical economists, Keynes recommended government intervention through fiscal policies (e.g., public spending, tax reductions) to boost demand and achieve full employment.