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 effective demand”.
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 countries.
Reasons of 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 countries are:
(i) Greater dependence upon agriculture for livelihood.
(ii) Faster rate of growth of population than the developed countries of the world.
(iii) Old methods of production.
(iv) Absence of large scale industries.
(v) Unplanned economic development.
(vi) Ineffectiveness of monetary and fiscal policy measures.
Under the conditions stated above, if we blindly apply Keynesian technique for removing unemployment in underdeveloped countries, it will prove ineffective. The cure is to be sought according to the disease.
Solutions of Unemployment:
So the following policy measures are prescribed for healing the economic ills of the backward countries:
(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 planning methods.
(iii) In order to encourage savings, prize bonds and internal loans should be issued.
(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.
Reasons of Unemployment in Developed Countries:
In 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 unintelligent 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 inflation.
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 countries.