Unemployment: Keynesian and Monetarist Points of View



Unemployment: Keynesian and Monetarist Points of View

Introduction

Macroeconomics as a distinct field within economics emerged in the late 1930s as a response to John Maynard Keynes's General Theory of Employment, Interest and Money (1936/1973, referred to subsequently as GT). Keynes contrasted his views on the causes of depressions and persistent involuntary unemployment with those of his predecessors, whom he termed the classical economists. In Keynes's view, these economists assumed that the normal condition for a market economy is one of capital-accumulation-fueled growth with full employment of labor and capital and that periods of high unemployment were rare and temporary deviations from the norm. Keynes wrote that this assumption is empirically incorrect because economies frequently experienced prolonged periods of high unemployment and below-potential output (recessions or depressions). He presents his model by developing a critique of three dimensions of the classical theory: (1) Say's law, (2) the quantity theory of money, and (3) continual clearing of the labor market at “full employment.”Discussion

The causes of unemployment have long been a debate amongst economists and scholars alike. They have tried to dissect how a country's economy works, so that they may try to alter both the private and the public sectors to work with the international economy. The ways in which both local and foreign economies intertwined with each other makes it to be hard. For these economists to determine which influence to isolate so that they may be able to adjust policies for the betterment of a nation.

John Maynard Keynes is one of the most prominent economists of the 20th century. He coined numerous economic theories in which governments found applicable to today's times. One of his theories concerns involuntary unemployment, in which people are “involuntarily” laid off, or unemployed due to unwarranted savings, as well as the decrease of private investments. If private sectors start to cut their investment, companies will not anymore open their doors to people for employment. When a country experiences recession, Keynes stated that the neoclassical thought of economic theory will not work since this economic thought deals with rational choice, in which the supply and demand model takes place. During recession, even though there is demand, private sectors may choose not to create alternative investments since the economy is down. Of course, the burden of employing the people will be on the government if the private sectors will not employ them. Governments will then start to create jobs for these people, as well as increase their benefits, so that the balance of unemployment and inflation will remain low.

In addition, Keynes pointed out the importance of nominal wages when it comes to unemployment. He theorized that if the people accept a much lower wage than the currently accepted wage level firms will then start to cut their prices; therefore, a new equilibrium born. This is in connection with the purchasing power of the people, as well as the cost of living in a country. He said that if firms start to layoff or not to employ people ...