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Employment And Wage Rate Theory In The Keynesian And Neo Classical School

1783 words - 7 pages

In 1935 John Maynard Keynes wrote the General Theory of Employment, Interest and Money, which was revolutionist and it importantly changed the way of how the world had been thinking the economy. Keynes was right The General Theory changed the way of economic thinking. The theory refused several traditional beliefs about savings, investment, and particularly unemployment. However, Keynes's General Theory was based on the previous theories before it. Some of the ideas presented in The General Theory can be seen in Classical theory and Marxist theory.Keynes developed and wrote The General Theory in order to influence and correct the government policy. Although several Keynes's own ideas in The General Theory were not original, Keynes was the first person to get them largely accepted and to use them to affect the government policy. Furthermore, Keynes provided a more general theory than existed in the past which had been developed by classical economists, and he caused an important change in the focus of aggregates, the short run, and the problems of employment. In these ways we can easily say that the General Theory was quite innovative.The main idea of Keynes's theory was based on the balance level of employment, dependent on the amount of current investment. However it is not equal to the complete employment. Investment is not the only reason that influences the level of employment, but it can be considered as the most important factor because of its strong effect on incomes and this factor can be changed and shifted suddenly.Employment is specified by two elements, which are total income of the community, and the sum of the community's consumption and its investment. Keynes defines the relationship between the number employed and the total income the Aggregate Supply Function or Z=f (N) where Z is the aggregate supply price and N is the number employed. . He also defines the relationship between the number employed and the amount of consumption and investment the Aggregate Demand Function or D=f (N) where D is the aggregate demand price and N is the number employed.According to Keynes "there is only one value for which the total income equals the sum of the consumption and the investment, and it is at this point that the equilibrium level of employment is reached, which is similar to the way supply and demand determine the equilibrium price of a good" . At any level of employment, it is in the employer's interest to "hire more workers or to decrease the number of workers until the equilibrium level is reached; otherwise the employer might be producing more goods than can be sold or might not meet the demand for goods" . The rest of The General Theory is dedicated to proving the effects of investment on aggregate supply and aggregate demand.According to Keynes "investment's strong influence over aggregate supply and demand, and, through these, over employment is explained by the marginal propensity to consume and the multiplier" . Marginal...

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