Keynes Criticisms against Classical Theory Article shared by:
According to the classical theory, interest is the price paid for saving of capital. Like the value of other things, the price of saving is determined by its demand for and supply of savings. Let us consider the demand and supply sides separately. Demand for capital comes mostly from businesses.
There are, of course, some people who borrow for purposes of consumption, litigation or religious or social ceremonies. But most of the capital is demanded today by entrepreneurs who use it for productive purposes.
They will in no case pay for its services at a rate higher than its productivity at the margin. Productivity goes on diminishing as more and more capital is employed in an industry.
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The borrower compares the prevailing rate of interest with the marginal productivity of capital, i. He stops where he feels the productivity to be equal to the interest paid.
He will not pay more than the worth of capital to him at the margin. When the rate falls, it becomes worthwhile to use capital in occupations of lower productivity. Thus demand for it expands. All this is true of borrowers as a whole too.
Thus, it is clear that demand curve for capital or demand for savings to buy the capital will slope downwards towards the right see the I-I curve in Fig. According to the classical theory, the money which is to be used for purchasing capital goods is made available by those who save from their current income.
By postponing consumption of a part of their income, they release resources for production. Savings involve the element of waiting for the future enjoyment of savings.
But people prefer the present enjoyment of goods and services to the future enjoyment of them. Therefore, if people are to be persuaded to save money and to lend it to entrepreneurs, they must be offered some interest as reward.
In other words, to make people overcome their time preference, inducement must be offered in the shape of interest. The more savings the people will do, the more consumption they will have to postpone, the greater must be the rate of interest they will ask to make such a postponement worthwhile.
Thus, in order to induce people to save more, a higher rate of interest must be offered. Moreover, higher rates of interest have also to be paid if savings have to come from those persons whose rates of time-preference are relatively more strongly weighted in favor of the present satisfactions.
The supply curve of capital will therefore slope upwards to the right SS curve in Fig. Equilibrium between Demand and Supply: The rate of interest at which the demand for capital or demand for savings to invest in capital goods and the supply of savings are in equilibrium, will be the rate determined in the market.
The way in which the rate of interest is determined by demand for investment and supply of savings is shown in Fig. The demand for investment and supply of savings are in equilibrium at Or rate of interest where the curves intersect each other. Hence or is the equilibrium rate of interest which will come to stay in the market.
In this equilibrium position, OM amount of savings is lent, borrowed and invested. It seeks to balance the productivity of capital goods on the one hand and saving or supply of capital goods on the other, interest on capital has to be paid in order partly to induce people to postpone consumption and partly to induce them to risk their savings in business.
The more consumption they have to postpone, the greater must be the inducement or interest offered. The actual rate of interest is determined by investment demand side and saving supply side. The equilibrium rate of interest brings savings and investment into equality.
Classical theory of interest came in for serious criticism, specially at the hands of Keynes. The main grounds on which it is criticized are given as under: In other words, it assumes that an increase in the production of one thing must mean the withdrawal of some resources from the production of other things.
If investment is to be increased, for example, this can only be done if resources are withdrawn from the production of consumer goods. Therefore, if people are to be induced to postpone their consumption or wait for the future enjoyment of their savings, the reward in the shape of interest must be paid.Inspite of the above criticisms classical theory has proved to be quite successful in the field of management.
Most of the criticism of Fayol seems to be out of ego-clashes. Fayol's emphasis on making management a science had irritated the managers as it had lessened the importance of managers. Despite such criticisms, the classical theory of administration has exerted considerable influence on the fields of business studies and public administration, and it still provides the basic concepts which many managers use in clarifying their objectives.
Despite criticisms, the classical approach to business management is still relevant today.
Discuss one example to support this statement. (25%) Classical approach on management can be in terms of three major perspective: scientific management, Bureaucracy and administrative principles, which are emphasis on purpose and formal structure, for.
Jun 29, · Classical management theory is a time-tested approach to small business management that has been used for over years. Its advantages are rooted in its hierarchical structure and clear division. Classical Management Theorists and its Criticisms As we know that the seeds of scientific management were sown long before Taylor brought together several strands of thinking into a single methodology for applying scientific principles to the design and organization of work.
Garegnani and others argue that Keynes' criticisms of the classical theory of interest apply to later neoclassical writers, but not to Ricardo.
Classical Management Theorists and its Criticisms As we know that the seeds of scientific management were sown long before Taylor brought together several strands of thinking into a single methodology for applying scientific principles to the design and organization of work. In short, classical theory, in Keynes’ view, is unrealistic and irrelevant to the present conditions and out of date, and, thus, cannot be a guide to the solution of modern economic problems. Keynes Criticisms against Classical Theory. Article shared by: ADVERTISEMENTS: The following are the main points of Keynes’ criticisms against the classical theory: 1. Keynes strongly attacked the classicists for their unrealistic approach to the problems of contemporary capitalist economic system. Pigou’s plea for a return to free.
This paper re-examines Keynes' criticisms. It argues that Keynes attacked Ricardoapos;s theory of interest despite his awareness that .