Keynesian theory and underdeveloped countries

Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods. In essence, therefore, Keynesian economics turn out to be economics of depression applicable to developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s theory has  little to say directly, to the underdeveloped countries, for it was framed entirely in the context of an advanced industrial economy, with highly developed financial institutions and a sophisticated business class.

Though Keynesian Economics has revolutionized modern economic thinking, it has inherent weaknesses:

  • It is fundamentally a capitalistic theory. It basically examines the determinants of employment in a free enterprise economy. Though Keynes suggests government intervention and controlled capitalism his theory fails to deal with the socialist economic system. In communism, Keynes is as Ricardo.
  • Keynesian economics is, by and large, characterized as depressionary economics. It was the outcome of the Great Depression of the Thirties. It suggested policy measures like deficit financing to solve the problem of unemployment in a depressionary phase of the capitalist economy. In the era of inflationary situation, the theory has not much validity.
  • Keynes’s theory deals with short-run phenomena only. It pays little attention to the long-run problems of a dynamic economy.
  • Keynesian theory is not strictly applicable to underdeveloped countries. Keynes deals with the problem of cyclical unemployment. Underdeveloped countries have the problem of chronic unemployment and disguised unemployment. Keynes encouraged spending and condemned savings.But; poor countries need curbs on spending and increase in savings for capital formation and wide-scale investment to break the vicious circle of poverty. In short, Keynes’s theory is not really “general” in application as Keynes claimed.
  • One dangerous practice is that the solution to global economic crisis and depression in advanced capitalism was sought to be applied for solving the economic crisis of less developed countries. In fact in the west there are arguments against Keynes’s economics that it is not Keynesian economics but the Second World war revived the world economy.  Keynesian revolution succeeded the industrial revolution as an adhoc theory of countering the industrial depression in Britain during the thirties, just before the Second World War, became the all-encompassing theory of development. Dennis Robertson at the out set of his Cambridge lecturers, delivered between 1945-46 to 1956-57, warned the under graduate students about the controversial nature of Keynes’s General Theory and to supplement its readings by critical writings on the same.
  • Laws of economics are relative and valid for particular situations in the economic history of a nation. To the British economists, the economic forces generated by the industrial revolution in that country was universal and economic laws were accordingly formulated. What was good for Britain was good for the entire world, irrespective of differences in socio-economic conditions. But great personalities like Arnold Toynbee argued against this dominant view and the need for region specific models of development. His dream of this way of study never materialized because of his premature death and lack of followers. Adam Smith advocated free trade at a time when British manufacturing industries, particularly the textile mills had increased their capacity through various practical innovations. Trying to universalize economic laws has been one of the greatest disservices to the science of economics. The attempt by the third world countries to formulate their development plans on the basis of these economic laws has created serious imbalances in their economy and has kept them perpetually indebted, leading to erosion of their economic independence.
  • Lord John Maynard Keynes (J.M. Keynes) was a great advocate of easy money policy and abundance of credit for economic prosperity. Keynesian prescriptions failed in developing countries due to inelastic nature of agriculture sector and high inflation. Keynes found D.Robertson’s ideas inconvenient and chose to ignore it. An academically and theoretically sound thesis will not shy away from an academic debate. The relation between agriculture and industry does not form a part of the theoretical frame work of the General Theory of Keynes. Keynes was highly intolerant of his critics and he had high hope in capitalism and he could avoid economists jumped into Marxist band wagon. Indian planning was over influenced by Keynesian school because of the economic experts trained in British Universities or Anglo-Saxon schools. In India Dr.B.S.Minhas resigned from Planning Commission protesting against high inflationary practice (Keynesian model of deficit financing).But no one from the academic world or Planning Commission came to his support. It is of importance to note that deficit financing started with the recommendation of the IMF in its report in 1953.N.Kaldor says that the deficit financing imply a corresponding increase in privately owned wealth.


Although the policy measures suggested by the Keynesian theory may not be suitable to the problems of underdeveloped countries, it does not mean that Keynesian economics has no significance. Indeed, Keynesian methodology of thinking in macro-economic terms is very essential and appropriate in understanding the major problems of any economy, whether developed or developing. However, in view of the changing institutional set-up of the developing economies during the process of planning and socio-economic reforms, Keynesian tools have to be adopted with suitable modifications.

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  • Isaac Turyatemba

    Critically evaluate the Keynesian theory of unemployment in the context of developing countries