KEYNES' ATTACK ON CLASSICISM Or

KEYNES' CRITICISMS OF CLASSICAL THEORY OF

EMPLOYMENT
Keynes turned away from classicism, and became a bitter Titic of the
classical postulates..
Firstly, Keynes refused to accept the classical theory that the
economic system was self-adjusting and that it [Link] automati ally
without any extraneous aid. The classical idea that the economic
system was self-adjusting was derived directly from Say's Law of
Markets which states that supply always created its own demand. As
such, the classicists believed that there could be no discrepancy or
maladjustment between supply and demand, or there could neither be
overproduction nor underproduction. Say's Law laid down that supply
and demand would always be in equilibrium with each other, and
further, this process of equilibrium was automatic and self-adjusting.
Keynes refused to accept Says formulation. He rather launched a
vigorous attack upon it, In this attack on Say's Law, Keynes is
sustained by the early socialists and the underconsumptionists like J.
A. Hobson. Due to the non-egalitarian structure of society, there are
two principal classes, the rich and the poor, and wealth is unequally
distributed between them. The rich have too much of wealth but they
cannot consume it. The poor, •on the contrary, have too little wealth
and cannot meet all of their
 70 j The Classical Theo,yoflncome and Employment
requirements. The result is that national consumption cannot keep pace
with national production. It leads to a deficient aggregate demand, or, in
other words, to overproduction and unemployment. The classical
assertion that there can never be Overproduction and general
unemployment is, thus, proved an erroneous analysis, and the economic
system, assumed to be self-adjusting, is, in reality, never self-adjusting in
character. In Keynes' view,. therefore, State intervention is necessary to
bring about adjustment between supply and demand. This was the first
assault that Keynes made on the citadel of classicism.
Secondly, Keynes attacked the Pigovian formulation that
unemployment would disappear if the workers were to accept a voluntary
cut in wages. He strongly opposed the Pigovian plea for wage flexibility as
a means of promoting employment at a time of depression. Rather he went
all out in favour of wage rigidity to promote and expand employment. Let
us first of all examine the argument of the classicists that wage cuts would
result in increased employment for the workers. like the example of a
particular industry, say, the textile industry, and assume that the employers
resortto wage cuts to lower down their costs. As a result of these wage
cuts', it is obvious, the cost would fall down. If the costs fall down, the
prices cannot remain high. A fall in the prices of textiles would certainly
push up their demand. The output shall have 'to be expanded necessitating
the employment of more workers. The employment would thus, increase
in the textile industry as a result of introducing wage cuts. So far, so good.
The classical analysis is perfectly valid up tosthis point.
But the classical analysis breaks down when wc pass from wage -
cuts in the textile industry to general wage. cuts oruage cuts in all the
industries taken together. A general wage cut applied to all industries shall
fail to bring about an expansion in employment. Keynes, here, pointsout
that a general wage cut would lessen the purchasing power in the hands of
the workers which would result in cutting down their effective demand for
the products of industry. No doubt, the costs in all the industries would fall
down as a result of a general wage cut, but that in itself would not increase
'effective demand because the purchasing power in the hands of the
workers has been curtailed as a result of the general wage cut, Workers
would not now be in a position to buy as much as they used to buy before
the introduction of the general wage cut. A decline in aggregate effective
demand would, thus, result not in increasing but in actually decreasing the
volume of employment. A general wage cut, according to Keynes would,
thus, lessen the volume of employment. Here; Keynes came into direct
clash with Pigou who held that a general wage cut would expand
employment. The differences between the two were fundamental in nature.
While Pigou held that employment depended upon the level' of money
wages and could be substantially increased by curtailing them; Keynes was
of the view that employment depended upon the level of effective demand
which w
The Classical Theory of Income and Employnent | 71
be maintained by leaving wages intact. Keynes was, thus, a bitter
opponent of wage cuts as a method of expanding employment
opportunities. It may, however, be repeated that the classical analysis
is perfectly valid when applied to the case of a single industry, where
a wage cut would certainly lead to an expansion of employment. But
a
general wage cut instead of increasing would actually decrease
employment on account of its adverse effects on the level of effectivc
demand. At the root of controversy between Pigou and Keynes lay the
basic concept of the dual nature of wages. Wages were not only costs,
but they were incomes also. While Pigou attached importance to the
former aspect, i.e., the cost aspect, Keynes concentrated wholly on
the latter aspect, i.e., the income aspect. It may not be untrue to say
that the classicists including Pigou failed to give any importance to
effective demand. Or, would it be wrong to say that the classicists
"suffered from a lack of a theory of effective demand."
Thirdly Keynes opposed money wage cuts not only on the ground
that they were economically undesirable, leading to a general decline
in the effective aggregate demand, but also on the ground that it
would be impolitic to do so in view of the resistance of the workers to
any such attempt. Even if general unemployment was being caused by
money wage being too high, the solution would not be to cut money
wages but to cut workers' real wages by raising prices of wage goods
through monetary inflation. As Keynes himself said, "Whilst workers
will usually resist a reduction of money wages, it is not their practice
to withdraw their labour whenever there is a rise in the prices of wage
goods" (or, a fall in real wages). In other words, in case of necessity,
Keynes stood for a reduction not of money wages but of real wages.
There were two principal reasons for holding this view— (1) The
workers were much less agitated over cut in real wages than a cut in
money wages. The reason being that a cut in real wages on account of
a rise in prices applied to workers in all the industries and not merely
to workers in one particular industry. The workers in a particular
industry affected by the cut in real wages had the satisfaction that the
workers in other industries were also being adversely affected. (2)
While a cut in money wages imposed by an employer in a particular
industry could be resisted by strike action, a cut in real wages imposed
by general economic forces could not be the subject matter of a strike
against the employer. Because of these reasons, Keynes consistently
opposed any cut in money wages.
 Fourthly, Keynes attacked classicism for its unrealistic approach
to the problems of contemporary capitalist world. Pigou's vigorous
plea for a return to "free" or, to use his own words, - "thoroughgoing
competition", to secure an increase in employment sounded somewhat
"obsolete" in the changed conditions of the world. Pigou lamented the
present day State interferences with the free working of the economic
system. He contended that it were these "interferences" which by
hindering the frec working of the economic system caused
unemployment
 72 1 Classical and Employment in the economy. once these
"interferences" were done away with, the would to function
seen how faulty such an argument was. Besides, even if we wish, we
cannot do away with these "interferences", They have become part and
parcel of our economic system. In brief, the whole classical approach is
unrealistic; out-of-date, obsolete and hardly likely ever to be accepted in the
changed conditions of today or tomorrow.
Fifthly, Keynes did not agree with the classical view that the
laissez-faire policy was essential for an automatic and self-adjusting
process of full employment equilibrium. He pointed out that the capitalist
system was not automatic and self-adjusting because of non-equalitarian
structure of the society, He advocated that state intervention is essential
for adjusting supply and demand within the economy through fiscal and
monetary measures.
Sixhly, Keynes did not agree with the classical view that the saving
and investment were equal at the full employment level, and in case of any
divergence the equality was brought about by the mechanism of rate of
interest. Keynes hold that level of saving depended upon level of income
and not on rate of interest. Similarly, investment is determined not only by
rate of interest but by the marginal efficiency of capital also. For example,
a low rate of interest cannot increase investment if the business
expectations are low.