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Book Name – Macroeconomics (HL Ahuja)
What’s Inside the Chapter? (After Subscription)
1. Introduction
2. Traditional View: Limitations and Irrelevance of Keynesian Economics for Developing Countries
2.1. The Demand-Deficiency Problem
2.2. Keynes’ Policy Prescriptions are not Relevant
2.3. Keynesian Multiplier is Inapplicable to Underdeveloped Countries
3. Modern View: Relevance of Keynesian Economics in Some Important Resepcts
3.1. Problem of Deficiency of Effective Demand
3.2. Investment Behaviour in Developing Countries
3.3. Portfolio Choice by Investors
3.4. Keynes’s Consumption Function
3.5. Keynesian Multiplier and the Present-Day Developing Countries
3.6. Role of Government Intervention
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Limitations and Relevance of Keynesian Economics to Developing Countries
Chapter – 44
Introduction
Keynesian macroeconomics was primarily concerned with cyclical unemployment arising in industrialised capitalist economies, especially during periods of depression.
During the Great Depression (1929–33), developed capitalist countries experienced a sharp decline in GNP, leading to severe unemployment; J.M. Keynes argued that this depression and large-scale unemployment resulted from a fall in aggregate effective demand for goods and services.
Keynes developed a theory of income and employment in which the levels of income and employment are determined through the interaction of aggregate demand and aggregate supply.
In the early 1950s, while some economists questioned the validity of Keynesian theory even for advanced Western economies, several prominent Indian economists raised doubts about its applicability to developing countries such as India.
Notable among them were V.K.R.V. Rao and A.K. Dass Gupta, who argued that the economic problems of developing countries were fundamentally different from those faced by developed Western countries during the Great Depression.
Their central contention was that, because the nature of economic problems differed, the Keynesian theory of income and employment and its associated policy prescriptions were not particularly useful or relevant for the then underdeveloped economies.
This constituted the traditional view regarding the inapplicability and irrelevance of Keynesian economics to developing countries like India.
However, according to the author, after more than six decades of economic growth and development in countries such as India, many principles and postulates of Keynesian theory have become increasingly relevant to the economic problems faced by present-day developing economies.
The discussion involves two perspectives: the traditional view, which regarded Keynesian economics as largely irrelevant for developing countries, and the modern view, which sees many Keynesian ideas as relevant in the contemporary context of developing economies.
Traditional View: Limitations and Irrelevance of Keynesian Economics for Developing Countries
The Demand-Deficiency Problem
Deficiency of effective demand was the central proposition of Keynesian economics; Keynes argued that the sharp decline in GNP and rise in involuntary unemployment during depressions resulted from a deficiency of aggregate demand, particularly due to a fall in investment demand.
Critics of Keynesian economics in developing countries argued that the problems of slow economic growth, poverty, and unemployment arose from entirely different causes and could not be explained by deficiency of aggregate demand.
According to this view, poverty and unemployment in developing economies were rooted in more fundamental structural factors, especially the inadequacy of capital stock relative to the labour force, rather than a shortfall in demand.
A.K. Das Gupta maintained that, regardless of the generality claimed for Keynes’s General Theory, its applicability to the conditions of an underdeveloped economy was limited because the economic realities of such economies differed substantially from those addressed by Keynes.
Consequently, Keynesian policy measures aimed at raising aggregate demand—such as increasing government expenditure through deficit financing—were considered unsuitable as instruments for accelerating income growth and employment in developing countries.
The argument was that unemployment in developing economies was predominantly chronic disguised unemployment, caused by deficiency of physical capital and lack of wage goods, whereas Keynesian theory focused on cyclical, involuntary, and open unemployment arising from a decline in effective demand.
The traditional criticism concluded that both the causes of unemployment and the appropriate policy remedies in developing countries differed fundamentally from those identified by Keynes for advanced capitalist economies experiencing depression.