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David answered on
Dec 31 2021
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Hayek and Keynesian Theories of Employment 2
Abstract
The study of the quantitative and qualitative aspects of allocating, distributing and producing the
economic resources is known as Economics. With the help of the mathematical and statistical
calculations, economics is the study of monetary policy of any country‟s government. Qualitative
aspect of the study is that where with the help of the fiscal information, the economists makes
judgments and inferences about the economy of a country. There are two schools of economics
and these are Classical and Keynesian. Both the school of thoughts follow different approaches
of studying the economy and its components like employment, unemployment and its related
factors like inflation and wage rate. There are few distinguished characters that exists in these
schools and thus differentiate their thought process.
The paper is a research analysis of the two leading economists of both the school of thoughts,
which are Classical- Friedrich Hayek and Keynesian- John Maynard Keynes, about their
theories of employment and unemployment. But the theories begin with a common framework
wherein there exists a single composite good which is produced in the conditions of diminishing
eturns each scarce factor of production and constant returns to scale.
The production function describes the conditions that supervise the production process and the
labor demand is derived from production function.
The supply of labor is based on individual decisions to give up other activities - loosely
described as leisure - and allocate time to labor. These relations yield a negatively sloped
aggregate demand curve for labor relating offers of employment and the relative price of labor,
or real wage, and a positively sloped supply curve of labor. The intersection of the two curves
determines the market clearing real wage and the equili
ium level of employment.
Hayek and Keynesian Theories of Employment 3
Unemployment can be defined as the difference between the amount of employment demanded
and supplied at each real wage or as the difference between actual and equili
ium employment.
Both definitions are in use cu
ently.
Introduction
The Postulates of the Hayek’s Economics
THE TRUE THEORY OF UNEMPLOYMENT
Although the detailed explanation of unemployment in the theory is true but it is unstable as it
describes a discrepancy between two processes; the distribution of labour and production factors
etween the industries and second, the demand distribution among the products of the industries.
Due to the disfigurements, discrepancies occur in the system of relative prices and wages and
these e
ors can only be altered by changing the relation that exists between these factors. The
change in the relation between the factors is done by establishing those factors of economy in the
sector where supply is equal to demand.
Unemployment is caused when the economy deviates from the point of equili
ium in context of
price and wages that is being established only in a free market and a condition of money
stability. But another contradicting situation is that, it is difficult to find out in advance the
equili
ium point of prices and wages. Therefore, it is not possible to measure the difference
etween the cu
ent prices and the equili
ium prices, which allows a part of labour supply to be
sold off. Also, it is impossible to calculate the statistical co
elation that may exist between the
distortions of relative price and volume of unemployment. The causes of such consequences are
Hayek and Keynesian Theories of Employment 4
very effective although they are non-measurable effects. As per many economists, only the
factors which are measurable are important, thus they have been in a situation of superstitions
and are being misled by these thoughts.
The Misdirection of Labour- Cause of Unemployment
At the time of inflation there are jobs that are being offered for temporary time basis, these jobs
are designed in a way that they attract more and more people to join it. But as that the inflation
start accelerating at a sufficient rate the jobs disappear from the economy. This result takes place
ecause the inflation:
- Alters the distribution of the many across the various sectors and between the stage of
production process.
- The further rise of the prices is being expected in the economy.
The ones who supports the policy of monetary policy employment often try to represent the
theory in a which shows that there is a single factor that is sufficient to increase the total demand
in the economy to secure the full employment level for an indefinite period.the argument is
ignores the unavoidable effects of a policy on both the distribution of labour between industries
and the wage policies of trade union.
If the government takes the responsibility of maintaining the full employment level in the
economy, then whatever the trade union demands in context of wages will have no effect on the
employment level and will not cause unemployment in the economy. In a situation it is very
important to increase the total demand if there is a rise in the wages which may exceed the
increase in the productivity. The rise in the demand will help to stop unemployment that will
follow if the total demand is not increased. The increase in the quantity of money made
Hayek and Keynesian Theories of Employment 5
necessary by the upward movement of wages thus released becomes a continuous process
equiring a constant influx of additional quantities of money. There should be a change in the
elated of demand for certain types of goods and services, if there is additional supply of money
in the economy; at these changes should
ing about a change in the related prices and thus
changing the direction of the production process followed by allocation of factors of production
which includes labour.
The conclusion that can be drawn from the arguments above is that the dependency of a larger
number of labour‟s jobs are on the period of inflation, because the longer the inflation, longer
will be the duration of the temporary jobs. It does not mean that these labourers will not get a job
after the inflation is over, but it is due to the fact that these temporary jobs are so attractive that
labourers want to get employed with these jobs for longer periods.
The Postulates of the Keynesian Economics
Keynesian Revolution: General Theory of Employment, Income and Rate of Interest was
introduced by Lord John Maynard Keynes and was first published in the year 1936. Keynes was
the first person who introduced complete account of macroeconomics activities for the first time
ever in the history of economics. His theory considered as a landmark in the history of economic
sciences as it an outstanding piece of work wherein he has analysed the theory of employment,
income, and rate of interest. He introduced a number of novel scientific ideas that
eak through
the glass of classical tradition of economics and entered the new era of modern economics and
modern theories, his theories are known as Keynesian School of economics.
Hayek and Keynesian Theories of Employment 6
From the time when he opened the new scopes of macroeconomic analysis and has widened the
esearch opportunities for the Economists, since then he developed a number of followers, to
name a few: HA
od, Domar, Kaldor, Mrs.Robinsons, Solow etc.
There have been a lot of fundamental changes in the practices and policy-making of economics
after the General Theory was being published. It is because of these reasons that the theory is
known as Keynesian revolution. The theory has left a revolutionary impact on the economic
and was being demonstrated in various ways. He introduced a number of innovative and latest
techniques of analyzing various factors of economics. The theories and the functions of the
economics was introduced by him and these are equations of income and expenditure,
consumption function, law of marginal propensity to consume (MPC), multiplier operations,
investment function and marginal efficiency of capital (MEC), identity between savings and
investment, and his pure monetary liquidity preference theory of interest accompanied by
speculative motive for demand for money.
(a) Keynesian saving-investment plans: He proved that there is no need of communication
and interaction between the savers and the investors as these are two separate groups, and
only the financial intermediaries are the common connection between them. When the
economy is in recession, then the investment may not be equal to savings, although the
ate of interests are comparatively low...