Keynes 'General Theory' explains, the short period fluctuations in income and
employment of a highly industrialized economy. It also suggests positive
measures for increasing income and curing unemployment. According to Keynes:
"Whenever there is cyclical unemployment in the country, its main reason is the
deficiency of aggregate
The deficiency of effective demand can
be met by adopting the following policy measures.
(i) The government should prepare a plan of public works which can be put into
execution at a short notice. When a government finds that the gap between
community income and community expenditure is widening, it should increase
investment by starting .public works program such as construction of railways,
canals, buildings, roads, etc.
(ii) The government should adopt suitable fiscal and monetary measures for
encouraging increased purchases of output so that the level of business activity
and employment is increased. It can adopt cheap money policy for stimulating
business investment. It can decrease tax rates for encouraging investment.
Deficit financing can also be adopted to even out the cyclical fluctuations.
We agree with Keynes that in a developed economy, short run ups and downs in
business activity result from deficiency of aggregate effective demand and
temporary unemployment can be cured by increasing investment. The economic
conditions in underdeveloped countries are different from the advanced
Unemployment in Under Developed Countries:
The unemployment in backward countries is caused by the dearth of
stock of capital in relation to the requirements of the increasing labor force.
In addition to this, the other main reasons of unemployment in backward
(i) Greater dependence upon agriculture for livelihood.
rate of growth of population than the developed countries of the world.
methods of production.
(iv) Absence of large scale industries.
(vi) Ineffectiveness of monetary and fiscal policy
Under the conditions stated above, if we blindly apply
for removing unemployment in underdeveloped countries, it will prove
ineffective. The cure is to be sought according to the disease. So the following
policy measures are prescribed for healing the economic ills of the backward
(j) The scarce resources of the countries should be utilized through planned
program of development.
(ii) The rate of growth of population should be reduced by introducing family
(iii) In order to encourage savings, prize bonds and internal loans should be
(iv) Banking, insurance, trade and commerce should be encouraged in the
country so that there is less dependence on agriculture.
(v) Small scale industries should be encouraged with large scale industries.
(vi) Foreign loans should be obtained so that the unemployed resources are
utilized at a rapid rate.
(vii) Special institutions should be opened for providing technical knowledge
to the workers.
(viii) The monetary and fiscal measures should be adopted with utmost care as
they are liable to create inflation rather than cure unemployment in the
country. This is because of the fact that economic conditions of backward
countries are basically different from that of the advanced countries.
advanced countries of the world, unemployment occurs because of deficiency of
aggregate demand, whereas in backward countries, unemployment results from the
glaring deficiency of stock of capital. So if monetary and fiscal measures are
applied unintelligently to increase capital equipment and technical Knowledge,
it is liable to create inflation in underdeveloped countries. Similarly, deficit
financing is also very delicate tool to be used for Increasing the productive
capacity of the country. If it is not wisely applied, it will also lead to
From the above discussion it can be easily concluded that the first two
measures, i.e., vigilance and plan of public works as suggested by Keynes can be
applied in solving the problems of underdeveloped countries, but the third
measure, i.e., monetary and fiscal policy is to be very carefully used. The
other tools of economic analysis such as marginal propensity to consume,
multiplier, liquidity preference, marginal efficiency of capital, etc.,
developed by Keynes are very useful for the developed as well as underdeveloped