12 Important Criticisms against Keynesian Theory of Unemployment

2. Unrealistic assumption of perfect competition:

In real business world imperfect competition is found instead of perfect competition even in capitalist economics. Therefore, it is not applicable in advanced economies.

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3. No determinate functional relationship between effective demand and employment:

Critics point out that there cannot be a definite functional relationship between ED and employment. Keynes did not provide any evidence of this functional relationship.

There is no direct relationship between ED and level of employment. In fact everything depends upon the complex inter­relationship of wage rates, prices and money supply.

4. Wholly aggregative in nature:

It is highly aggregative because it deals with aggregate concepts such as aggregate consumption, total investment and total output.

These aggregate concepts may be misleading because these do not explain the economic problems of individual economic units like firm, industry and individual consumption.

It is not the size of investment alone that determines employment but the character of investment also affects production and employment.

5. Undue importance to inducement to invest:

Keynes theories solely rely on investment to increase employment. Critiques point out that other determinants of employment were ignored by Keynes.

6. Criticism of consumption function:

Everybody knows that when income increase, consumption also increases. Thus, consumption function is a truism.

Prof. Hazet criticizes Keynes’ consumption function on the basis that it is purely quantitative, but consumption function has qualitative aspect as well.

Prof. Hazet also points out that actual experience and empirical evidence do not support Keynes’ consumption function.

7. Keynes ignores long-run problem:

Keynes assumes that ASF is given. Thus, it is a short-run theory and provide solution to short-run employment problem. Keynes himself said, “In future we are all dead.”

8. Keynes theory is not general:

Keynes theory is not applicable anywhere and everywhere. Its application, as best, is limited to industrially advanced countries and it has little relevance to the problems of under­developed countries like India.

9. Keynes ignored accelerator effect:

Accelerator and multiplier work simultaneously. Multiplier describes the effect of investment on consumption and the accelerater shows the effect of consumption on investment. But Keynes ignored the accelerator effect completely.

10. Liquidity preference theory of interest is indeterminate:

This is an incomplete theory as it considers interest a purely monetary phenomenon. But rate of interest is not determined by monetary factor alone. Real factors also affect the rate of interest.

11. No explanation of partial equilibrium:

Keynes theory offers no solution to the problem of depression in an individual or particular industry.

12. Other:

Mere cheap monetary policy may fall to stimulate business activities during depression. It provides no explanation of cost-push inflation. Moreover Keynesian economics is an economics of depression.

There may be weaknesses in Keynesian theory. However, it made a notable contribution to economics theory.

Its prescriptions have wider application to solve practical economic problems. It is revolutionary theory and marks a sharp departure from classical thinking.

Keynes theory provided tools of thinking which helped and may help to seek solutions to many economic problems.

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