Keynes and underdeveloped countries

John Maynard Keynes

Once a great man said that, “Market can remain irrational longer than you remain solvent”. He was none one other than John Maynard Keynes. He was a British Economist whose ideas fundamentally changed the theory and practical application of Macroeconomics and the economical policies of the government. His economical theories are popularly known as Keynesian Economics. Keynesian Economics in simple term is the total splurge of Economy and its effects on out-turn and inflation. This economical theory was developed in 1930 is an attempt to understand the great depression. The relation of Keynesian economics with the underdeveloped countries is a subject of cavernous and indispensable discussion. Keynesian Economics in so far as it is constructed in his book the General Theory of Employment, Interest and Money, has little reasonableness in context of underdeveloped economies, that Keynesian Involuntary Unemployment is not the kind of unemployment from which these economies will suffer, and that is the problem in these economies is one of the long term economic development rather than attainment of ‘full development’ in the Keynesian sense. The General Theory of Employment Interest and Money Once A. K. Dasgupta commented on certain aspects of an important book on ‘Indian Fiscal Policy’ in which an appeal was made to the Keynesian theory of involuntary unemployment in the support of general policy of the protection of India, He said: “Has the argument any particular relevance to the case of India? Is there anything like involuntary unemployment in the country? Is it not pertinent if one asks for a demonstration of its existence before one accepts any judgment of policy which begs so delicate an assumption?” It might feel that Mr. Keynes had the case of its own country in view when he articulated his theory of involuntary unemployment. A country which is in its advanced stage of economic development where population is fast coming to stationary level , and where, further exist a strong trade union organization to resist any reduction of money wages, provides a peculiarly suitable soil for the application of Keynes theory. In the recent years several attempts have been made to apply Keyne­sian economics to solve the problems of underdeveloped countries like India. However, the attempts met with limited success. In fact, Keynes himself has admitted this when he said that “the theory of econom­ics does not furnish a body of settled conclusions immediately applicable to policy”. Keynesian economics reveals various inadequacies when applied to the realties of economic life in Under developing countries especially in those having fragmented product, resource, money and capital markets. Such market fragmentation goes by the name economic dualism. This problem arises due to the co-exist­ence of modern and traditional ways of doing things in both traditional (mainly agricultural) and modern (mainly industrial) sectors. The problem is highlighted by the deficient functioning of the saving-investment process and malfunctioning of credit systems as also by the influence of foreign economic powers including multinationals. Any Indian apostle of Keynes would like to think that some of his rebellious ideas developed because of his apprehension of the Indian economy as it operated in the twenties and thirties; but on the occasions when its to Keynes's distinguished biographer Robert Skidelsky, his response has always been that there is no clear evidence that Keynes had India at the centre of his attention at the time when he was writing 'The General Theory'. Keynesian theory developed in the environment of the great depression of the 1930s has lost its application in present-day under developed for the simple reason that economic problems, economic systems and institutions of under developed are quite different from those of the Western capitalist countries. Most of the countries were faced with the unemployment problem in 1930s and some of them adopted Keynesian remedy and succeeded in achieving full em­ployment. Moreover, the Keynesian income and employment theory also leaves the development economists perplexed about the causes of unemployment and what might be effective policies for full employment. The Keynesian invest­ment multiplier was first identified as an employment multiplier and it was predicted that increase in output would lead to an exactly proportional increase in employment. Indian economy on the other hand is characterized by entirely different set of conditions. Its not the saturation of the capital and surely not a refusal to the people to multiply that accounts for a low marginal efficiency of capital.  The following things are given to offer a summary of attitude towards this subject matter whatever may be the worth - 1. The propositions of the general theory are well known. It would be an honor to restate them in slightly different order, placing emphasis on certain ingredients and bringing out one or two implied assumptions which are relevant on present enquiry.  What is the definition of full employment? Full employment refers to a state in which any person willing to work at a wage rate that corresponds to his economic contribution to social product finds a job at that wage. From this it follows that in a state of involuntary unemployment the utility of wage exceeds the marginal disutility of labour. Keynes does not offer an independent theory of wages. He accepts the ordinary theory that the real wage rate is equated-in equilibrium to the marginal productivity of labour. The wage bargain in the market runs in money terms, and the real wage rate is derived from the money wage rate relative to the prices of wage-goods. Labour is employed upon a given capital paraphernalia, and is pushed up to the margin of profitableness. A short period equipoise is thus envisaged for the economy as a whole. However, although Keynes analysis runs in terms of a short period, it does not preclude longer-run inferences. For, a long period is a succession of short periods, each endowed with a different capital equipment and carrying the legacy of the past. Propositions supporting the Keynesian theory of involuntary unemployment can now be set forth. (i) Money wage rate is fixed more or less conventionally between employers and trade unions. Consumption, investment, prices, etc.; arc measured in terms of ' wage-units', i.e., the money wage received by representative unit of labour. (ii) Prices of wage-goods, along wit h the general price levels, arc determined by the expenditure on consumption and investment.  (iii) Expenditure on consumption goods is limited, with reference to a given prospective income, by the extent to which income-earners are inclined to spend rather than to save (marginal propensity to consume).  (iv) Expenditure on investment is limited, given the market rate of interest, by the prospective marginal net yield of investment (marginal efficiency of capital).  (v) A decision not to spend on consumption does not necessarily mean a decision to invest; the rate of interest which is ordinarily supposed to be the connecting link between the two is determined not just by the propensity to save but by the preference of the public to hold cash (liquidity preference). (vi) The expenditure on consumption and expenditure on investment, between them, make up the aggregate demand price of output as a whole, and short period equilibrium is struck at a point where the aggregate demand price is equated to aggregate supply price.  (vii) Under conditions of equilibrium, therefore, the price level may be too low relatively to the given money wage rate, or, in other words, the real wage rate may be too high for full employment to be secured. More than full employment can be ruled out, for the workers have the option not to work if the real wage rate fails to compensate for the disutility of labour. But less than full employment is a probability; indeed it tends to be a normal feature of an economy which sutlers from a low marginal propensity to consume and a low marginal efficiency of capital.  3. This is Keynes' General Theory in its pure form. Its a try to bring out the essentials of the theory and to put it in a form which makes it inevitable that any pushing up of implementation should be accompanied by a reduction in the real rate of wages. Now one who is acquainted with the conditions of an underdeveloped economy of the sort we have here under consideration, with the earnings of the majority of the working population practically below the minimum subsistence level, will find it hard to see how the prevailing real wage in these economies could be too high. It should be obvious from a probe of the constituent elements of Keynesian economics, as listed above, that they pertain to an economy in which ' money' serves as the instrument of economic operations, in which these operations include borrowing and lending, and in which, further, the ownership of the means of production is divorced from the use of these means, which is to say that labour is divorced from capital.  4. The possibilities of involuntary unemployment is not denied, in so far as even an underdeveloped economy may contain an organized sector wherein the Keynesian propositions hold good. But its magnitude is not likely to be appreciable, if only because the marginal tendency to consume in a low level economy, despite huge inequalities of income, tends to be relatively high; and, although investment opportunities are limited, yet, when account is taken of the fact that most of these economies are characterized by a rapidly growing population.  What happens in this background about the much talked of stagnation theory?  Will each expansion in the stock of capital lower the marginal efficiency of capital while it raises the marginal productivity of labour?  Does expansion itself contain seeds of stagnation?  The answer is again to be sought in Nurkse's hypothesis. Capital saturation is a long way off for an underdeveloped economy with a strong pressure of population and a depressed standard of living. For such an economy, an increase of capital resources, if it could be brought about, will make possible a simultaneous development of industries and will have rather the effect of raising the marginal efficiency of capital. In - deed this points to a peculiar feature of an underdeveloped economy which distinguishes it fundamentally from a so-called mature economy. Note to § 3 Assuming, for example, persons involuntarily unemployed constitute 10 per cent of the number actually employed in organised industry, and assuming further that organised in - dustry absorbs 5 per cent of the total working population (these are hypothetical figures), we find that involuntary unemployment turns out to be just 0.5 per cent of the total working population. We do not have reliable unemployment figures for India. However, the following table showing the waste due to unemployment in certain other countries is revealing. The figures have been taken from Colin Clark's Conditions of Economic Progress (1st Edition, p 77 ). They are based on the most generous assumption, namely, that the average productivity of the unemployed would have been about the same as these who were actually in work if the unemployed had been absorbed in industry. Yet, barring USA, Canada, Great Britain and Germany—countries which are definitely the more capitalistic in our sense,—the waste due to unemployment during a period which includes years of one of the severest depressions known in history, is surprisingly small.  Youth is the building block of the nation. Being home of 1.2 billion people of which  20 % is youth, discover India through the  perspective of its youth. If you like this blog please follow us to support this channel. The follow button is available at the sidebar. 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